1. C HAPTER 4: PUBLIC GOODS

2. P UBLIC PROVISION OF GOODS Private provision of certain goods (particularly those that are non-excludable and non-rival in consumption) may fail to produce the efficient level of the good/service because of the incentives to under-contribute or free ride. Why would a person voluntarily contribute to the provision of a public good when he/she can enjoy the benefits without such contribution? Conventional economic models suggests:___________________ More recently, experimental studies show that contributions are often positive, and not zero. However, an under-provision of the good still results. Experimental studies find:

3. P ROBLEMS : EFFICIENT PROVISION OF PUBLIC GOODS 1. o How does a government collect demand information on a good/service in cases where no private market exists (such as national defense) to know how much of the service is optimal? o perhaps demand information could be elicited from citizens via survey instruments? o Would consumers accurately supply such information? 2. o How much, in monetary terms, do you value national defense?

4. P ROBLEMS CONTINUED 3. __________________________________ If efficient provision of public goods depends on supplying a good such that MRSa + MRSb = MRT then consumers must reveal their true WTP or preferences to arrive at the optimal provision level. Note: this is not a problem with private goods since you either pay the market price and receive the good and/or gain access to a service; or you fail to pay and do not receive the good/service (since private goods are excludable). With public goods there is an incentive to:

5. P ROBLEMS CONTINUED 4. requires adoption of some social welfare function This area of economics is referred to as political economy or how the government go about making decisions about the appropriate level of provision. 5. _______________________________ : If true preferences could be identified, and appropriate contributions determined then the government would need some way of forcing contributions (typically taxes). In general, taxation distorts prices and therefore economic incentives and behavior. They typical result in some degree of efficiency loss. Therefore, a first best solution is not practical. Taxation will be discussed in the 3 rd section of the course.

6. R EAL WORLD EXAMPLES P UBLIC GOODS o Public broadcasts, such as radio stations, are public goods by nature. They are non-rival and non-excludable and therefore face problems with insufficient contributions to fund the optimal level of programming. o WNYC, New York City radio station, estimates that they have 1 million listeners and only 75,000 contribute each year (7.5% of listeners). o Contributions account for 35% of operating budget. o Obvious free riding occurs here! To avoid this same problem the BBC (national TV station in UK) charges a $200 annual licensing fee to anyone who owns and operates a TV. Enforcement? They maintain a database of addresses recorded when TV purchases are made and use TV detection devices to sense if a TV is being used. If no license, fee of up to $1,500!

7. F REE - RIDING LITERALLY 1994, the town of Cambridge tried to provide a green alternative to the dirtier forms of transitcars, buses, and trains. Cambridge spent $20,000 on 350 green bicycles scattered throughout the city. Anyone could use the bicycle free of charge throughout the day, reducing reliance on other modes of transportation (non-excludable). Users were expected to return bikes to one of 15 stands after use at the end of the day. Within 4 days, not a single bicycle could be found. Presumably the bikes were taken, painted another color, and used privately or sold for cash. The green experiment failed! Why? Because the good in question had intrinsic value that could be captured by an individual. The good was not truly public in nature and entrepreneurs recognized the opportunity to maximize their private wealth and didnt care about social welfare. Literally free riders!

8. U NDER WHAT CONDITIONS IS THE PRIVATE PROVISION OF A PUBLIC GOOD CLOSE TO THE EFFICIENT LEVEL ? 1. Ex: a driveway shared by two homesa mansion and a shack. If one removes snow from driveway then both get the benefits (non-excludable). The mansion owner, with more money, may care enough to pay for the entire cost to have a clean driveway. 2. contributing to the public good because it enhances your welfare and the welfare of others; not simply maximizing your personal utility. Contributions are typically higher when:__________________________

9. C ONDITIONS CONTINUED 3.3. o This can be as simple as you feeling a psychological benefit from doing the right thing o Often associated with public acknowledgment of your contribution. o For example, we observe higher contributions when a plaque with names of supporters is displayed.

10. T HE PRIVATIZATION DEBATE Are there situations in which public goods are provided successfully by the private sector? Yes, such examples include: Such examples provide evidence that government intervention is not always the solution giving weight to privatization:

11. P RIVATIZATION EXAMPLES 1. Our court system has a private counterpart 2. _______________________________________: Ex: many BIDs occur in urban areas where sanitation (garbage collection, street sweeping, etc) are provided by the local government. However, due to budget constraints services are not provided at a sufficient level. The business owners pay a private firm to provide these services. They often result in _______________________________(as merchants move out of downtown areas and out to suburbs; BIDs address issues of crime, safety, cleanliness of these areas to attract retail back)

12. BID S CONTINUED o One of the first examples was NYCTimes Square. Local government tried for years to keep area clean and crime free to no avail. In 1992, a BID was formed hiring own sanitation workers, private security, etc. In theory, BIDs should fail due to: Many local communities, in an effort to minimize the free rider problem_________________________________________________ example, in NYC if 60% of the merchants voluntarily participate in BID, then taxes can be levied on all merchants in the BID area to force contributions. In the case of Times Square, 84% voluntarily contributed resulting in a BID with a budget of over $5 million and 120 employees.

13. P RIVATIZATION EXAMPLES CONTINUED 3. From text: Hurricane Katrina destroyed a government owned (car) bridge and a privately owned train bridge. with six months, the privately owned train bridge was fully reconstructed and open for business. within sixteen months, the government bridge was still under construction (only basic pilings –support structurewas completed).