1. L24
Public Goods

2. Public Goods -- Definition
Some goods are:
Nonexcludable (NE): property rights cannot be enforced.
Nonrival (NR): all consumers can simultaneously consume the good.
A good is public if it is NE and NR E NE R NR

3. Examples of public goods
National defense
Mathematical formula (Research)
Broadcast radio and TV programs
National parks

4. Park Size: Market Outcome
Two agents: A and B
Pubic good: Park
A: Regular consumer
B: Park lover

5. Plan for today 1. Free Markets (Nash Equilibrium)
2. Socially optimal outcome
3. Implementation

6. A: best response to

7. A: best response to

8. B: best response

9. Equilibrium
Nash Equilibrium:
best response to

10. Free riding by A In Nash Equilibrium: B: Creates a park of size 4
A: Does not contribute at all and uses the park created by B
Free riding by A
Size of the park (General rule)

11. Free Market Supply

12. Pareto efficient outcome
Mayor maximizes welfare of both A and B

13. Underprovision of public
Efficient size of Park: 6
Underprovision of public good
Public good: positive externality
(Pareto) optimal size (General Rule)

14. Socially optimal supply

15. Implementation of efficient outcome
How to implement efficient outcome?
Tax agents and provide Public Good
Problem: Information about valuation
Mechanism design: How to extract information in the least costly way