1. Public Goods
© 1999, 2007 by Peter Berck

2. Definition
A good is a pure public good if one person’s consumption of the good does not diminish another person’s consumption of the good.
Examples: National defense, TV Programs, Clean Air, Views, Existence of Wild Creatures

3. Market Doesn’t Work
Let P = a – bQ be a typical person’s marginal willingness to pay for the public good.
Suppose there are N people
Since EACH of the N people consume’s (enjoys? loathes?) Q
Total marginal willingness is
N P = N (a- bQ)

4. Social Welfare Max Demand=Total Marginal Willingness= N P = N (a- bQ)
So Social optimum
mc(Q) = NP = N (a-bQ)
or a – bQ = mc(Q) / N
in social optimum each person should bear only 1/N of marginal cost

5. Market Outcome
No person will buy any more Q when
P = a –b Q = mc(Q)

6. The Picture The public good is underprovided by the free market
N( a –bQ) mc
a -bQ

7. DWL Triangle is DWL. Area under N(a-bQ) is lost willingness.
Area under mc avoided cost.
N( a –bQ) mc
a -bQ

8. Conclusion
Although the Market will properly allocate private goods, like candy bars
It will not provide a outcome with public goods that
Maximizes surplus plus profits

9. Therefore With Public Goods, the government is needed to
either produce them
or stop them from being destroyed
It can accomplish these aims with
Command and Control (standards)
or Incentives (taxes)