1-1 CHAPTER 4 Public Goods Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

4-2 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

4-3 Types of Goods EXCLUDABLE RIVAL YESNO YES NO PRIVATE GOODS PUBLIC GOODS COMMON RESOURCES NATURAL MONOPOLY

4-4 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 –impure public good A commodity can satisfy one part of the definition of a public good but not the other 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 Public provision of a good does not necessarily mean that it is also produced by the public sector

4-5 Some Other Public Goods Basic research Programs to fight poverty Uncongested non-toll roads Fireworks display

4-6 Efficient Provision of Private Goods PriceAdam (D f A ) Eve (D f A ) Market (D f A+E ) $11516 $97310 $79514 $ $ $

4-7 DfADfA DfEDfE D f A+E SfSf $ Quantity of Pizza 4-7

4-8 Pareto Efficiency – Private Goods Case MRS fa = P f /P a Set P a = $1 MRS fa = P f D f A shows MRS fa for Adam D f E shows MRS fa for Eve S f shows MRT fa Necessary condition for Pareto efficiency: MRS fa Adam = MRS fa Eve = MRT fa

4-9 Efficient Provision of Public Goods Units of Fireworks 1234 Adam (D r A) $300$250$200$150 Eve (D f E ) Market (D f A+E ) $550$450$350$250

4-10 DrADrA Dr E D r A+E Sr Quantity of Fireworks $ 4-10

4-11 Pareto Efficiency – Public Goods Case MRS fa = P f /P a Set P a = $1 MRS fa = P f D f A shows MRS fa for Adam D f E shows MRS fa for Eve S f shows MRT fa Necessary condition for Pareto efficiency: MRS fa Adam + MRS fa Eve = MRT fa

4-12 Problems Achieving Efficiency The Free-Rider Problem Solutions to the free-rider problem –Perfect price discrimination Policy Perspective: Global Positioning System Do people free ride?

4-13 Laboratory Experiments and Free-Riding 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

4-14 The Privatization Debate Privatization – taking services supplied by government and turning them over to the private sector Public v Private Provision: What is the right mix? –Relative wage and materials costs –Administrative costs –Diversity of tastes

4-15 Distributional Issues Commodity egalitarianism – notion that some commodities ought to be made available to everyone

4-16 Public versus Private Production Efficiency of private production Problems in comparing cost differences Incomplete contracts Competition to supply good or service Reputation building Policy Perspective: –Should airport security be produced publicly or privately? Market Environment

4-17 Preference Revelation Mechanisms T Eve = MRT ra – (MRS ra Total – MRS ra Eve ) Eves choice: T Eve = MRS ra Eve By substitution: MRT ra – (MRS ra Total – MRS ra Eve ) = MRS ra Eve Add (MRS ra Total – MRS ra Eve ) to both sides: MRT ra = MRS ra Total