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PUBLIC GOODS Chapter 4

PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

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Page 1: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

PUBLIC GOODSChapter 4

Page 2: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Characteristics of Goods

• Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good

is relatively easy– Nonexcludable – preventing anyone from consuming the

good is either very expensive or impossible

• Rival vs. Nonrival – Rival – once provided, the additional resource cost of

another person consuming the good is positive– Nonrival – once provided, the additional resource cost of

another person consuming the good is zero

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Page 3: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Types of Goods

EXCLUDABLE

RIVALYES NO

YES

NO

PRIVATE

GOODS

PUBLIC

GOODS

COMMON

RESOURCES

NATURALMONOPOLY

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Page 4: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Noteworthy Aspects of Public Goods

• Even though everyone consumes the same quantity of the good, it need not be valued equally by all

• Classification as a public good is not absolute; it depends on market conditions and the state of technology– A commodity can satisfy one part of the definition of a public good but not the

other– Impure public good: rival or excludable

• Some things that are not conventionally thought of as commodities have public good characteristics

• Private goods are not always provided only by the private sector– publicly provided private goods: rival and excludable goods provided by govt

• Public provision of a good does not necessarily mean that it is also produced by the public sector (e.g. garbage collection)

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Page 5: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Some Public Goods

• Basic research• Programs to fight poverty• Uncongested non-toll roads• Fireworks display• Honesty• National Defense

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Page 6: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Efficient Provision of Private Goods

Price Adam (Df

A)Eve (Df

E)Market (Df

A+E)$11 5 1 6

$9 7 3 10

$7 9 5 14

$5 11 7 18

$3 13 9 22

$1 15 11 26

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Page 7: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

0

1

2

3

4

5

6

7

8

9

10

11

12

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

DfADfE

DfA+E

Sf

$

Quantity of Pizza4-7

Page 8: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Pareto Efficiency – Private Goods Case

• MRSfa = Pf/Pa

• Set Pa = $1• MRSfa = Pf

• DfA shows MRSfa for Adam

• DfE shows MRSfa for Eve

• Sf shows MRTfa

• Necessary condition for Pareto efficiency: MRSfa

Adam = MRSfaEve = MRTfa

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Page 9: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Efficient Provision of Public Goods

Units of Fireworks

1 2 3 4

Adam (DrA) $300 $250 $200 $150

Eve (DfE) 250 200 150 100

Market(Df

A+E)$550 $450 $350 $250

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Page 10: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

050100

150200250300350400

450500550600650

700750800

1 2 3 4

DrA

DrE

DrA+E

Sr

Quantity of Fireworks

$

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Page 11: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Pareto Efficiency – Public Goods Case

• MRSfa = Pf/Pa

• Set Pa = $1• MRSfa = Pf

• DfA shows MRSfa for Adam

• DfE shows MRSfa for Eve

• Sf shows MRTfa

• Necessary condition for Pareto efficiency: MRSfa

Adam + MRSfaEve = MRTfa

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Page 12: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Problems Achieving Efficiency

• The Free-Rider Problem• Solutions to the free-rider problem– Perfect price discrimination

• Policy Perspective: GPS is non-rival but excludable since technology exist to scramble signals

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Page 13: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Laboratory Experiments: Do People Free-Ride?

• How a typical experiment works• Typical results– People contribute about 50% of resources to provision of

public good– Contributions fall the more often the game is repeated– Cooperation fostered by prior communication– Contribution rates decline when opportunity cost of giving

goes up

• “Warm-glow” giving

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Page 14: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

The Privatization Debate

• Privatization – taking services supplied by government and turning them over to the private sector

• Public Sector v Private Sector Provision: What is the right mix?– Relative wage and materials costs: less expensive sector preferred on

efficiency grounds– Administrative costs: large fixed adm costs can be spread over a large

group under public sector– Diversity of tastes: larger diversity better handled by private sector– Commodity egalitarianism: some commodities ought to be made

available to everyone better achieved under public sector

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Page 15: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Public vs Private Production Debate

• Which sector is more efficient?– Theory that public sector managers have little

incentive to be efficient– However, problems in comparing cost differences

since quality of services offered by public and private sectors can differ. (e.g., hospitals)• Incomplete contracts• Competition to supply good or service• Reputation building

• Ultimately depends on Market Environment facing the providers

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Page 16: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Chapter 4 Summary

• Public goods are nonrival and nonexcludable in consumption – Impure public goods exhibit some qualities of private

and public goods• Efficient provision of public goods:– ∑MRSi

xy= MRTxy i=person i…..n• An incentive exists to free-ride in the payment of

public goods• Public goods can be provided privately; private

goods can be provided publicly

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Page 17: PUBLIC GOODS Chapter 4. Characteristics of Goods Excludable vs. Nonexcludable – Excludable – preventing anyone from consuming the good is relatively easy

Appendix: Preference Revelation Mechanisms for Public Goods

• ∆TEve = MRTra – (MRSraTotal – MRSra

Eve)

• Eve’s choice: ∆TEve = MRSraEve

• By substitution: MRTra – (MRSra

Total – MRSraEve) = MRSra

Eve

• Add (MRSraTotal – MRSra

Eve) to both sides: MRTra = MRSra

Total

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