Public Finance (MPA405) Dr. Khurrum S. Mughal

Lecture 6: Public Goods Public Finance

Public Goods are goods for which exclusion is impossible. –One example is National Defense: A military that defends its citizenry from invasion does so for the entire public. Public Goods 3

Characteristics of Public Goods Nonexclusion: The inability of a seller to prevent people from consuming a good when they do not pay for it. Nonrivalry: The characteristic that if one person “consumes” a good, another person’s pleasure is not diminished nor is another person prevented from consuming it. 4

Pure Public Goods and Pure Private Goods Pure Public Good: There is no ability to exclude and there is no rivalry for the benefits. Pure Private Good: There is a clear ability to exclude and there is rivalry for the benefits. 5

Marginal Costs for Provision of Public Goods The marginal cost of allowing another person to benefit from a pure public good is zero while the marginal cost of a greater level of public good is positive. 6

Marginal Costs of distributing a Pure Public Good-Figure A Cost (Dollars) Number of Consumers Marginal Cost of Allowing an Additional Person to Consume a Given Quantity of Pure Public Good 1 7

Marginal Cost of Producing a Pure Public Good Marginal Costs of Consuming and Producing a Pure Public Good-- Figure B Units of a Pure Public Good per Year Cost (Dollars) MC = AC

Example Bread versus Heat Bread – Clearly a pure private good because there is the ability to exclude and there is rivalry. Heat – Clearly a pure public good because there is no ability to exclude and there is no rivalry. 9

 Price Excludable Public Goods vs  Congestible Public Goods Provision of Private Good and Public Goods: Markets and Government 10

Price Excludable Public Goods Excludability but no rivalry Another type of good is a price- excludable public good: no rivalry but exclusion is easy. Examples: Country Clubs, Cable TV 11

Congestible Public Goods Rivalry but no excludability There are public goods where, after a point, the enjoyment received by the consumer is diminished by crowding or congestion. These are called Congestible Public Goods. –Examples: roads and parks 12

Marginal Cost per User A Congestible Public Good Number of Consumers per Hour 01 Marginal Cost 13

Alternate Means of Producing, Distributing, and Financing Goods and Services 14

Alternate Means of Producing, Distributing, and Financing Goods and Services 15

A B C H Excludability Rivalry Classifying Goods According to the Degree of Rivalry and Excludability of Benefits from Their Use 16