L24 Public Goods.

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Presentation transcript:

L24 Public Goods

Public Goods -- Definition Some goods are: Nonexcludable (NE): all consumers can consume the good. Nonrival (NR): each consumer can consume all of the good. A good is purely public if NE and NR E NE R NR

Examples of public goods National defense Mathematical formula (Research) Nice melody Broadcast radio and TV programs Reduction in air pollution National parks

Park Size: Market Outcome Two agents: A and B Two goods: Park and Burgers Park is a public good A: Burger lover B: Park lover

A: best response to

A: best response to

B: best response to

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 Size of the park (General rule)

Pareto efficient outcome Mayor maximizes welfare of both A and B

Underprovision of public Efficient size of Park: 6 Underprovision of public good Public good: positive externality (Pareto) optimal size (General Rule)

Implementation of efficient outcome How to implement efficient outcome? Tax agents and provide Public Good Problem: Information about valuation Mechanism design: How to extract information in the least costly way