CHAPTER

5
PUBLIC
GOODS
DOLOR SIT AMET
 OBJECTIVES
O1 O2 O3

Optimal provision Private provision of Public provision of

of public goods public goods public goods
 1. OPTIMAL PROVISION OF
PUBLIC GOODS
▪ Pure public goods: goods that are perfectly non – rival in
consumption and non – excludable.
Non rival in consumption Non – excludable

One individual’s consumption of a good does not Individuals cannot deny each other the opportunity
affect another’s opportunity to consume the good. to consume a good
 2. CLASSIFICATION

Public goods

Pure public Impure public

goods goods
 A. PURE PUBLIC GOODS
▪ Goodsthat constitutes both perfectly non – rival and non –
excludable
 B. IMPURE PUBLIC GOODS
▪ Impure public goods: goods that satisfy the two public good
conditions (non – rival in consumption and non – excludable) to
some extent, but not fully.
▪Ex:
▪Cable television: the use of cable TV by others in no way
diminishes your enjoyment of cable, so consumption is non rival
▪Walking on a crowded city sidewalk, are rival but not excludable.
 Tính cạnh tranh
BẢNG PHÂN LOẠI

Cạnh tranh Không cạnh

(Rival) tranh (Non –
rival)
Tính loại Loại trừ (Excludable) Hàng hóa tư Hàng hóa chung
trừ (Private Goods) (Common goods)
Không loại trừ (Non – Hàng hóa nhóm Hàng hóa công
excludable) (Club Goods) (Public goods)
2. PRIVATE PROVISION OF PUBLIC
GOODS
When will government intervene to economy?

Market failure

Public goods
 WHY DOES MARKET FAILURE
COME FROM?
▪ Free rider problem: when an investment has a personal cost
but a common benefit, individual will underinvest
▪ Altruistic: when individuals value the benefits and costs to
others in making their consumption choices.
 3. PUBLIC PROVISION OF PUBLIC
GOODS
▪ Crowd – out: as the government provides more of a public
good, the private sector will provide less. -> This decrease in
private provision will offset the net gain in public provision from
government intervention.
Example: Suppose that in the progovernment optimum, Ben and Jerry were each
providing 10 fireworks, at a cost of $10 for each person. The total private provision is
therefore 20 fireworks, but the social optimum is 30 fireworks.
-> To reach the social optimum, the government decides to take $5 each from Ben and
from Jerry, and use the $10 raised to buy 10 more fireworks.
-> Ben and Jerry have less $5 less, and they observe the government providing 10
fireworks
-> They cut their spending on fireworks by $5 each, so that they spend the same ($5 on
fireworks, $5 to the government) and see the same total fireworks (20)
 MEASURING THE OPTIMAL
SUPPLY PUBLIC GOODS
▪ Optimal supplied public goods: marginal cost is equal to total
social marginal rate of substitution.
 MRS
i
i
M ,C = MC M
 PUBLIC GOODS PROVIDING
▪ Government provides public goods:
▪ Difficulty: Synthesize public preferences and transform into
public policy decisions
▪Furthermore, public policy was into political issues.
▪Private sectors are able to solve free rider problems through
models: charity, fervor, desire for public goods
 PUBLIC SPENDING
▪ Public expenditure reflects the value of goods purchased by the
government to provide public goods for society to perform the
functions of the State.
▪Public expenditure to implement income redistribution policy.
 DETERMINANTS AFFECT TO
PUBLIC EXPENDITURE
▪ Government development
▪Changes in the general perception of public finance
 PUBLIC EXPENDITURE
ASSESSMENT
▪ Helping the Government use public financial resources more
efficiently by prioritizing expenditures to bring about practical
benefits for socio – economic development.
 HIGHLIGHTS
▪ Pure public goods are goods that are non – rival (my
consuming or making use of the good does not in any way affect
your opportunity to consume the good) and non – excludable.
▪For pure public goods, the optimal level of provision is the point
at which the sum of marginal benefits across all recipients equals
the marginal cost.
▪ The private market is unlikely to provide the optimal level of
public goods due to the free rider problem.
▪In some cases, the private market can overcome the free rider
problem, at least partially.
▪Public provision of public goods faces three important
problems: crowding out of private provision; determining the
costs and benefits of public projects; effectively reflecting the
public’s demand for public goods.
 QUESTIONS
Question 1: Think of an example of a free rider problem in your
hometown. Can you think of a way for your local government to
overcome this problem?
Question 2: Think about the rival and excludable properties of
public goods. To what degree is radio broadcasting a public
good? To what degree is a highway a public good?
Question 3: The citizens of Balaland used to pave 120 miles of
roadways per year. After the government of Balaland began
paving 100 miles of roadways per year itself, the citizens cut
back their paving to 30 miles per year, for a total number of
roadway miles paved per year of 130 miles. What might be
happening here?
Question 4: Suppose 10 people each have the demand Q = 20 –
4P for streetlights, and 5 people have the demand Q = 18 – 2P
for streetlights. The cost of building each streetlight is 3. If it is
impossible to purchase a fractional number of streetlights, how
many streetlights are socially optimal?