1. Prof. Dr. Younis El Batrik
Public Finance
Lectures in
PUBLIC FINANCE By
Prof. Dr. Younis El Batrik

2. PUBLIC GOODS AND EXTERNALITIES Classification of Goods and Services
Public Finance
PUBLIC GOODS AND EXTERNALITIES
Classification of Goods and Services
1- Private Goods
Private Decisions
Market transactions in exchange for money (Market Price)
Excludable and rival in consumption
2- Merit Goods
On the contrary of pareto optimum (allocative efficiency), individuals
undervalue certain goods and services (insufficient merit to it) as a
Result of uncertainty (Medical Insurance)
Government Ways:
Compulsion
Subsidies
Information

3. Classification of Goods and Services
Public Finance
Classification of Goods and Services
3- Public Goods
Defined by Paul Samuelson in 1954
Markets do not exist for public goods, as they are:
Non – rival:
Any increase in the number of users will not reduce the service
available to others, and without additional cost
Non excludable
Not possible to prevent use of the service by those who do not
pay for it

4. Examples of Pure Public Goods
Public Finance
Examples of Pure Public Goods
i. National Defense
Protection is indivisible
Additional persons involves no marginal or additional cost
No charge for the beneficiaries and no exclusion for who
do not pay
ii. Peace
Everyone wishes to maintain
An essential element of the first fundamental theorem of welfare
economics
iii. Law and Order
Beneficial to all individual in the society
Different valuations on specific elements of law and order

5. Examples of Pure Public Goods
Public Finance
Examples of Pure Public Goods
iv. Environmental Control
Government actions became Increasingly important:
pollution - Noise – Dwindling natural resources - Congestion
v. Monetary Stability
Common Monetary system to ensure against unpredictable
monterey changes (Central Banks)
vi. Regulatory Measures
Collective services require money regulatory measures (pure
food and drugs laws – traffic regulations)

6. Problems of the Provision of Public Goods
Public Finance
Problems of the Provision of Public Goods
Two Major Problems
1- The free rider
2- The prisoner’s Dilemma
The Free- Rider Problem
The example of the lighthouse
If the organization is wholly voluntary, one factor must exists
Either: To force the unreasonable persons to move off the island
- No unreasonable persons
IF not: As the common purpose would not overcome the strong
incentive to avoid sharing the expenses
Governmental action is necessary: The Government has the
power to compel all members of the society to contribute to
the costs of the collective goods

7. The Prisoner’s Dilemma Problem
Public Finance
The Prisoner’s Dilemma Problem
How to reach an agreement where individuals are interdependent
Mainly when the situation involves a large number of participants
The dilemma can be overcome by a reordering of incentives to
make the most beneficial choice for each individual is also the most
beneficial for all
Main Difficulties
A) The logistics problem of getting everyone to participate in
making decisions and sharing its costs.
The increasing temptation to free- ride since the contribution
of each individual is so small with little effect

8. Impure Public Goods and Services
Public Finance
Impure Public Goods and Services
The impure public goods (Quasi – Collective) Private by
nature – public by responsibility
Examples of Impure Public Goods
i. Public Education
The whole community benefits (indivisible) certain families benefit
Directly (divisible)
ii. Public Parks
Only visitors enjoy
Non visitors do not enjoy

9. Public Finance
Debates on the appropriate extent of Government Activity is Centered on the Quasi- Collective Category
The main question how to finance different categories of Quasi-
collective goods
direct charges levied on users with or without general taxes
supplement
The relative importance or the presence of private and collective
benefits of any activity cannot be measured objectively
The individuals subjective estimation leads to different governments
approach in organizing and financing impure public goods

10. Historical and Efficiency Effects
Public Finance
Historical and Efficiency Effects
- Some government activities are financed as if they are wholly private
Postal Services
Highway facilities and services
Provided by governments with divisible benefits financed from direct
users charge
It is useful to distinguish between public governmental support:
By financing
And by providing