1. Mr. LAU san-fat CH13-Public Goods/Ver 2004 1 Chapter 13: Public Goods References: – Advanced Level Microeconomics, LAM pun-lee, CH 18 – A-Level Microeconomics, CHAN & KWOK, CH 17 – HKALE Microeconomics, LEUNG man-por, CH 19

2. Mr. LAU san-fat CH13-Public Goods/Ver 2004 2 Private Goods A good is a private good if its consumption by any one person would reduce the amount available for others. Examples: – Ice-cream – Chewing cum – A pair of shoes

3. Mr. LAU san-fat CH13-Public Goods/Ver 2004 3 Public Goods A good is a public good if its consumption by any one person does not reduce the amount available for others, i.e. it can be c__________________ consumed by many individuals at the same time. The MC of serving an additional user is z____. Examples: – An outdoor circus, national defence, a battleship and a TV programme

4. Mr. LAU san-fat CH13-Public Goods/Ver 2004 4 Private vs. Public Goods A private good is of rivalry and exclusive consumption while a public good is non- r_________ and non-e______________ in nature.

5. Mr. LAU san-fat CH13-Public Goods/Ver 2004 5 Private vs. Public Goods However, whether a good is public or private is a often a matter of degree. – A good could no longer be equally available to all when it reaches its c___________ limit, e.g. an outdoor circus. – Even capacity limits are not met, a good may be of different q_____________ as the number of users increases, e.g. battleship.

6. Mr. LAU san-fat CH13-Public Goods/Ver 2004 6 Private vs. Public Goods Question 1: Explain whether the following products are public goods. – courts – police & firemen – flood control measures – knowledge – stories, songs & poems

7. Mr. LAU san-fat CH13-Public Goods/Ver 2004 7 Private vs. Public Goods Question 2: Is a public good the same as a free good?

8. Mr. LAU san-fat CH13-Public Goods/Ver 2004 8 Market Demand Curve for a Public Good As a public good can be concurrently consumed by many individuals at the same time, its value is the sum of the MUVs placed on each unit by ALL individuals consuming the good. Therefore, we can derive the market demand curve for a public good by adding together all individuals demands v_____________ (for reflecting their MUVs)..

9. Mr. LAU san-fat CH13-Public Goods/Ver 2004 9 Market Demand Curve for a Public Good MUV A MUV B MUV (A+B) P Units of a public good P P MUV1 MUV2 MUV3 0 MUV(1+2) MUV3 0 0 Q1 Q2

10. Mr. LAU san-fat CH13-Public Goods/Ver 2004 10 Pricing Problems of Public Goods 1. The problem of joint supply/i________________: A public good is in joint supply in the sense that once it is produced, any given unit of the good can be made equally available to all.

11. Mr. LAU san-fat CH13-Public Goods/Ver 2004 11 Pricing Problems of Public Goods Restricting the use of a public good constitutes a waste in terms of a loss in the total use value derived from the good (area ) P P1 D = MUV 0 Q2 Q1 Qty

12. Mr. LAU san-fat CH13-Public Goods/Ver 2004 12 Pricing Problems of Public Goods If charging a price on a public good constitutes a waste, that good should be available free of charge, however, if so, how would its production costs be financed?

13. Mr. LAU san-fat CH13-Public Goods/Ver 2004 13 Pricing Problems of Public Goods The problem of marginal cost pricing – As the MC of accommodating an additional consumer is essentially zero, any person should be allowed to use a public good free of charge as long as a positive use value can be derived. – However, there is fixed costs of production, declining but still positive average cost and total cost.

14. Mr. LAU san-fat CH13-Public Goods/Ver 2004 14 Pricing Problems of Public Goods 3. The problem of exclusion/f____-r______ With concurrent consumption, people who do not pay voluntarily for the public good cannot be excluded from the benefits. There exist high transaction costs in excluding non-payers, i.e. free-riders, or in enforcing e______________ in the case of a public good.

15. Mr. LAU san-fat CH13-Public Goods/Ver 2004 15 Private Production of Public Goods 1. A lump-sum fee charging An individual is allowed to use a public good without restriction after paying a lump-sum fee just below his or her MUV for that good. However, the information costs in measuring one's true use value is prohibitively high as each individual tends to understate his or her own use value in order to maximize his or her wealth.

16. Mr. LAU san-fat CH13-Public Goods/Ver 2004 16 Private Production of Public Goods 2. Practicing perfect price discrimination An individual is allowed to use a public good without restriction after paying a lump-sum fee just below his or her MUV for that good. However, the information costs in measuring one's true use value is prohibitively high as each individual tends to understate his or her own use value in order to maximize his or her wealth.

17. Mr. LAU san-fat CH13-Public Goods/Ver 2004 17 Private Production of Public Goods Granting patents and copyrights Users of a public good with patents or copyrights have to pay royalties, thus restricting the consumption of that good. Question 3: In order to maximize social benefits, the MP3 music or songs should be allowed to download freely from the Internet. Agree?

18. Mr. LAU san-fat CH13-Public Goods/Ver 2004 18 Private Production of Public Goods Though the MC of reproducing the music or song via downloading is almost zero, there is a high fixed cost of financing its original production. Allowing free downloading without paying royalty would discourage people's incentive to create, invent and innovate.

19. Mr. LAU san-fat CH13-Public Goods/Ver 2004 19 Private Production of Public Goods 3. Charging time price The consumers of a public good may have to pay for it in terms of the time they spend in listening to or watching the advertisements.

20. Mr. LAU san-fat CH13-Public Goods/Ver 2004 20 Private Production of Public Goods R. Coase finds that the British lighthouse system was provided by private enterprises in the nineteenth century. The role of the government was limited to establishing and enforcing p__________ r________ to the lighthouses.

21. Mr. LAU san-fat CH13-Public Goods/Ver 2004 21 Further Reference Readings 1. 2.