L24 Public Goods.

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Presentation transcript:

L24 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 (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 1. Free Markets (Nash Equilibrium) 2. Socially optimal outcome 3. Implementation

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 Size of the park (General rule)

Free Market Supply

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)

Socially optimal supply

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