L23 Public Goods.

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Presentation transcript:

L23 Public Goods

Public Goods -- Definition Some goods are: Nonexcludable (NE): property rights cannot be enforced. Nonrival (NR): all consumers can simultaneously consume the good. A good is public if it is NE and NR E NE R NR

Examples of public goods National defense Mathematical formula (basic Research) Broadcast radio and TV programs National parks

Park Size: Market Outcome Two agents: A and B Pubic good: Park A: Regular consumer B: Park lover

Plan for today 2 scenarios: Free Markets (Nash Equilibrium) Socially optimal outcome Implementation in free markets

A: best response to

A: best response to

B: best response

Equilibrium Nash Equilibrium: best response to

Free riding by A In Nash Equilibrium: B: Creates a park of size 4 A: Does not contribute at all and uses the park created by B Free riding by A

Free Market Supply

Pareto efficient outcome Mayor maximizes welfare of both A and B

Underprovision of public Under provision of public good - Unregulated markets - Efficient size of Park: Public good: positive externality

Socially optimal supply

Implementation of efficient outcome Two problems Free riding Underprovision of public good Solution: tax and provide Public Good (National defense, Parks, Foundational research) Problem: Information about valuation Mechanism design: How to extract information in the least costly way