2. Public Goods Many definitions in use
Focus on characteristics that might cause resources to be misallocated
Not just public provision
One of two characteristics:
Collective Consumption
Nonexcludability

3. Collective Consumption Goods
Consumption by one consumer will not reduce the consumption of any other consumer
MC = 0
Example: radio broadcast signal

4. The Argument for Public Sector Production
At efficient output level P=MC
MC = 0 for collective consumption good
For efficiency, P = 0
Private sector will not produce efficient level of output
Solution: Government production at zero price

5. The Argument for Private Sector Production
Lack of congestion might be because of past overproduction
Private production provides a revealed price mechanism
Public production is financed through taxation
Benefits of production vs. excess burden

6. Congestion of Collective Consumption Goods
Collective consumption goods can become congested
Collective consumption is an economic concept, not technological
Cannot evaluate based on good’s characteristics
Example: swimming pool

7. The Optimal Output of a Collective Consumption Good
Private consumption goods
Market demand determined by horizontally summing individual demand curves
Collective consumption goods
Market demand determined by vertically summing individual demand curves

8. The Optimal Output of a Collective Consumption Good

9. Lindahl Pricing
Set so each individual pays a marginal price equal to the marginal benefit that individual receives
Not necessary for the efficient level of output
Individuals cannot adjust individual quantity consumed
Price does not have to equal consumer’s marginal valuation to be efficient

10. Lindahl Pricing Advantage: everyone prefers same level of output
Increases likelihood that efficient level of output is chosen
Practicality?
Earmarked gasoline taxes
Financing public education through property taxation

11. Pure and Impure Collective Consumption Goods
If each consumer’s consumption share is a function of total output, optimality condition holds regardless whether public or private good
Anytime consumer cannot quantity adjusted, optimality condition holds
Example: public education

12. Nonexcludability
Once produced, it is difficult to keep people from consuming the good
Unrelated to collective consumption
Does not have to be publicly provided
Example: National defense

13. Nonexcludability as a Prisoner’s Dilemma
Free riding
Incentive to benefit from the good without contributing to production
Self-interest = everyone free rides
Inability to cooperate leads to prisoner’s dilemma

14. Nonexcludability as a Prisoner’s Dilemma

15. Nonexcludability and Collective Consumption in Public Goods
Public goods embody two characteristics
Only one is needed to be a public good
Some have elements of both
Pure private good
Excludable, private in consumption
Pure public good
Nonexcludable, collective consumption

16. Nonexcludability and Collective Consumption in Public Goods
Pure private good
Excludable, private in consumption
Pure public good
Nonexcludable, collective consumption

17. Nonexcludability and Collective Consumption in Public Goods

18. Public Policy Towards Public Goods
Public goods do not have to be produced publicly
Examples:
Microcomputer software
Television
Radio