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Chapter 4 - Public Goods
Chapter 4 - Public Goods
Public Goods
1
Public Goods
Public Goods are goods for which
exclusion is impossible.
One example is National Defense:
A military that defends one citizen
from invasion does so for the entire
public.
2
Characteristics of Public Goods
Nonexclusion: The inability of a seller to
prevent people from consuming a good if
they do not pay for it.
3
Pure Public Goods and
Pure Private Goods
Pure Public Good: No ability to exclude
and no rivalry for benefits.
Pure Private Good: Clear ability to
exclude and rivalry for benefits.
4
Marginal Costs for Provision of
Public Goods
The marginal cost of allowing
another person to benefit from a
pure public good is zero, while the
marginal cost of providing a
greater level of public good is
positive.
5
Figure 4.1 Marginal Costs of Consuming and
Producing a Pure Public Good-Figure A
200
Cost (Dollars)
0 1 Number of Consumers
6
Figure 4.1 Marginal Costs of Consuming and
Producing a Pure Public Good--Figure B
9
Price Excludable Public Goods
Excludability, but no rivalry
10
Congestible Public Goods
Rivalry but no excludability
There are public goods where, after a
point, the enjoyment received by the
consumer is diminished by crowding or
congestion. These are called
Congestible Public Goods.
Examples: roads and parks
11
Figure 4.2 A Congestible Public Good
Marginal Cost
A
1
C
H
Excludability
B
0 1
Rivalry
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Education as a Public Good
Education is a service that has some characteristics of a public
good and some characteristics of a private good.
External benefits
It helps us live in a civil society.
It has a “socializing ” function.
It teaches the importance of following rules, obeying orders, and
working together.
It provides students with basic skills like punctuality and the ability
to follow directions that increase their productivity as workers.
It helps students identify their abilities and choose appropriate
occupations, thereby increasing productivity levels for a nation.
14
Education as a Private Good
Education has characteristics of a private good.
Wide disparities exist in the quantity and quality of
education provided among school districts.
The level of support that parents can give students at
home increases with income and home support is an
important factor in learning for children.
There is no way to prevent parents who want more
than a standardized quantity and quality of education
for their children from buying it in the marketplace.
15
Demand For a Pure Public Good
Market demand for a Pure Private
Good is derived by adding quantities
demanded at each price.
Demand for a Pure Public Good is
derived by adding how much people
will be willing to pay at each quantity.
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Figure 4.4 Demand For a Private Good
Price per Loaf of Bread (Dollars)
7
6
5
4
E S = MC = AC
3 D = Σ QD
DC = MBC
2 DB = MBA
DA = MBA
1
0 1 2 3 4 5 6 7 8 9 10
Loaves of Bread Purchased per Week
17
Figure 4.5 Demand For A Pure Public Good
800
Marginal Benefit (Dollars)
Z1
700
Z2
600
500 Z3
400 Z4
300 D= Σ MBA
200 DA = MBA
DB = MBB
100 DC = MBC
0 1 2 3 4 5
Security Guards per Week
18
Figure 4.6 Efficient Output for a Pure Public Good
800
Marginal Benefit (Dollars)
700
600
500 E MC = AC = MSB
400
D= Σ MBi = MSB
300
200 MBA
MBB
100 MBC
0 1 2 3 4 5
Security Guards per Week
19
Efficient Output of a
Pure Public Good
The socially optimal level of the public good
requires that we set the Marginal Social
Benefit of that good equal to its Marginal
Social Cost. MSB = MSC
Lindahl Pricing: Everyone in a group cooperates and
participants each pay their marginal benefit.
We can demonstrate this issue mathematically,
numerically (using a table), and graphically.
20
Mathematically: Lindahl Pricing
Recall from Figure 4.5 that the marginal
social benefit for a pure public good is the
sum of the individual marginal benefits.
That is: MSB = Σ MB.
21
Numerically: Lindahl Pricing
Suppose we have three people who
are discussing the issue of hiring
security guards. Note that each
person places a different value on
the levels of security.
22
A Numerical Example
Number of Security Guards per Week
1 2 3 4
MBA $300 $250 $200 $150
MBB $250 $200 $150 $100
MBC $200 $150 $100 $50
Σ MB $750 $600 $450 $300
If the cost of security guards is $450 per week, then no individual will
hire even one guard, even though to the group one guard is worth
$750. The group should hire three.
If they each pay their marginal benefit, then three guards are hired.
Person A pays $600 ($200 per guard), person B pays $450 ($150 per
guard) and person C pay $300 ($100 per guard).
23
Lindahl Equilibrium
The amount each person contributes, ti,
depends on individual desires for the public
good.
The sum of the contributions equals the total
cost of the public good.
Σ tiQ* = MC(Q*) = AC(Q*)
Σ ti = MC = AC
All individuals agree to pay their shares.
24
Freeriding
Freeriding occurs when people
are not honest in stating their
Marginal Benefit, because if
they understate it, they can get
a slightly reduced level of the
public good while paying
nothing for it.
25
Freeriding is easier with
Anonymity: If everyone knows who
contributes, there can be powerful social
stigmas applied to shirkers.
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