Public Goods and Economic Efficiency Presented by Cheng Yi Lik

Private Goods its consumption by any one person would reduce the amount available for others e.g., a piece of land, an apple, etc

Public Goods its consumption by any one person does not reduce the amount available for others can be consumed concurrently by many individuals at the same time e.g., outdoor circus, national defense, TV programme, lighthouse, etc

Public Goods

Private Goods vs. Public Goods is a matter of degree capacity limits are met well before a good has become equally available to all quality of the good may change because of the increasing number of users many goods lie in the intermediate range of the spectrum between wholly public and wholly private

Private Goods vs. Public Goods

Example Lighthouse Broadcast programme National defense Stage performance

Example

Problems in the Pricing of Public Goods 1. The problem of joint supply or indivisibility - to charge a price for its use would restrict its total use value (waste) 2. The problem of marginal cost pricing - Pareto condition requires that all goods be sold at a P equal to their MC of production - no revenue will be generated if public goods are sold at MC

Problems in the Pricing of Public Goods

3. The problem of exclusion - once a public good is produced is produced, it can be consumed by all individuals - people who do not pay for the good cannot be excluded from the benefits (free-riders)

Private Production of Public Goods Lump-sum fee Perfect price discrimination Patents and copyrights (e.g., music or song) Time price (e.g., broadcast programme)

Natural Monopoly / Decreasing Cost Industries the AC of production declines continuously the MC is always less than the AC the firm would suffer loss since the AC is higher than the price if transaction costs are zero, a private firm still produce efficiently if perfect price discrimination or a lump-sum fee is allowed

Natural Monopoly / Decreasing Cost Industries