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Lecture 4 Chapter 4 Public Goods Lecture 4 Chapter 4 Public Goods What we are going to do ◦ Definitions ◦ Examples Rivalry – If someone consumes a good, then no one else can Excludability – If you don’t pay, you don’t get the good. Private Goods: Goods that are rival and Excludable Result in no Externalities Public Goods Public Good ◦ you can’t stop people from consuming it (nonexcludeable) ◦ Your consumption doesn’t affect other’s consumption (nonrivalrous) Public goods are associated with externalities because no one has a property right to a public good. Public goods lead to free riding Benefiting from a good without paying for it. Public Goods Examples of Rivalry ◦ Is Satellite TV rivalrous? No, it is nonrivalrous ◦ Is it Satellite TV exludable? Yes, they can turn off your service ◦ Is it a public good then? No, a good has to be both nonrivalrous and nonexcludable. Public Goods Example of Excludability ◦ Is fishing international waters excludable? No, who is going to enforce? Think Whale Wars ◦ Is it rivalrous? Yes, there are only so many fish in the ocean? ◦ Is it a public good? No, because it is rivalrous Public Good Examples National Defense ◦ Rivalrous? Excludable? ◦ No. It is a public good because it is nonrivalrous and nonexcludable Fireworks show ◦ Rivalrous? Excludable? ◦ No, it is a public good because it is nonrivalrous and nonexcludable Public vs. Private Bread Heat Purely Private Purely Public Total consumed = sum Everyone feels the same of individual temp consumption Impossible for one to A market could form consume more heat and and people could adjust exclude the others their consumption Individuals will not be according to their able to adjust according preferences to their preferences Everyone Consumes the same amount IfIce a creamgood is is both rival,also rival excludable,because and excludable, my SomeCableIt is excludable, TVgoods is non are -since rival,“impure” thebecause cablepublic my Tableitconsumptionbecause is a1 private I can good.of simply it precludes not share yougoodsconsumptioncompany myfrom because can ofsimply theyit in no arerefuse way non to-rival, hook consumingiceOtherForYet creamitexample, is goods non with the-excludable are a you. samecrowded “impure” ice because sidewalkcream. publicbutdiminishesupFinally,NationalIt is itThe the they isalsois system.pure arenondefense your (to-publicexcludable, someconsumption. is goodsa classicextent) becauseare both onlygoodsrivalclearly waybecause becausevery Definingfor difficult you your they to enjoyment consumeto are prohibitpure rival, it isbutexcludable.nonexample.once andis to -notrival an impure area and It is nonis non protected,- excludable.-publicrival because everyone goods my makeexcludable.reducedpedestrians more as moreicefrom cream. usingpedestrians theIs sidewalk. alsoconsumption“consumes”the good that of rival national protection. in defense consumption? use the same sidewalk. protection does not diminish your consumptionYes of it. No Yes Ice cream Cable tv Is the good excludable? No Crowded city sidewalk National defense Marginal Cost of allowing additional consumers to consume a public good Once a public good has been provided, what is the additional cost of allowing an additional person to enjoy the good? Don’t confuse distribution with production Think of the marginal cost of allowing an additional person watch a fireworks display. Marginal Cost of Producing A Public Good Let’s think production: Does the fact that a good is “public” alter how much it costs to produce another unit of the good? Main Point: The marginal cost of producing a public good is positive for each unit (the constant marginal cost curve is for simplicity of explanation) Good Classification Goods vary in their levels of excludability and Rivalry Provision of Public and Private Goods What is the traditional way that we believe private goods are provided to consumers? Public Goods? What are examples of goods that are both provided privately and by the government? ◦ Tennis Courts, Education, Golf Courses Congestible Public Goods Def: Goods for which crowding or congestion reduces the benefits to existing consumers when more consumers are accommodated ◦ Marginal cost of accommodating an additional consumer is not zero after the point of congestion is reached Example: a user of a congested road decreases the benefits to existing users by slowing traffic, increasing accident risk Other Examples? Congestible Public Goods How do we graphically present a congestible public good? Price-Excludable Public Goods Def: Goods with benefits that can be priced Can be individually consumed and are subject to exclusion, but their production and consumption is likely to generate externalities ◦ Membership rights to private clubs ◦ Schools, hospitals, transportation Is higher education a pure public good? Why Does the Government fund Higher Education then? Annotated Bibliography Def: An annotated bibliography is a list of citations to books, articles, and documents. Each citation is followed by a brief (usually about 150 words) descriptive and evaluative paragraph, the annotation. The purpose of the annotation is to inform the reader of the relevance, accuracy, and quality of the sources cited. Alphabetical Order by last name of first author Citation Style Notes are what you need to write your paper At least six total references, two from peer reviewed journal articles Due Date: October 20th Where to find peer reviewed journal articles? Market Demand for a Purely Private good – Think Horizontal Each Individual chooses how much they want at each price Demand for a purely Private good is the horizontal summation of the individual demand curves. ◦ Make sure demand is solved as Q a function of P, then add. For Example Q= 20 – 2P Price S=SMC of ice cream $3 $2 D DJERRY BEN SMB =DBEN+JERRY 0 QJERRY QBEN QTOTAL Quantity of ice Notice cream MBJerry = MBBen = MSC Efficiency Demand for Pure Private Good •Notice how the marginal conditions for efficiency are met: •MBA = MBB = MBC = MC •Also notice that these are prices per loaf Demand for Pure Public Goods – Think Vertical All consumers must consume the same quantity of the good ◦ Pure public goods cannot be divided into individual units Demand for public good is the maximum individuals are willing to pay for the amount of the good that is available Demand for public good is the vertical summation. Think Price as a function of quantity, P = 10 - .5Q Price of missiles $6 S=SMC $4 DJERRY $3 $2$2 SMB=DBEN+JERRY DBEN $1 0 1 5 Quantity of missiles Notice: the sum of the marginal benefits equal the marginal social cost. Demand for Pure Public Goods For one Guard: ◦ Person A is willing to pay $300, ◦ person B $250 ◦ person C $200 ◦ Total for one guard = $750 You Try Bill’s demand for hamburgers (a private good) is Q = 20- 2P and Ted’s demand is Q = 10 – P 1. Write down an equation for the social marginal benefit of the consumption of the hamburger 2. Now suppose that hamburgers are a public good. Write down an equation for the social marginal benefit of hamburger consumption. Quantity Alice Ben Carolyn Don You Try 1 1000 800 600 400 2 800 600 400 200 3 600 400 200 100 4 400 200 100 50 The table shows how the marginal benefit of a service varies for four consumers. a) Suppose the service is a pure private good and is sold in a competitive market with only buyers being the four in the table. If the market price of the product is $400, what is the quantity demanded? b) Suppose the service is a pure public good. What is the marginal social benefit of two units of service? c) If the MSC of the good is $2,000 what is the efficient output assuming that it is a pure private good? d) If the MSC of the good is $2,000 what is the efficient output assuming that it is a pure public good? Efficiency of a Pure Public Good Review: The marginal social benefit of any given amount of a pure public good is the sum of the individual marginal benefits received by all consumers. Efficient quantity per time period corresponds to the point at which output is increased so that the sum of marginal benefits to consumers equals marginal social cost of the good. Efficiency conditions are: i i •From the perspective of Society •Is one security guard efficient? •Are two security guards efficient? •Are three security guards efficient? How to finance public goods Lindhal Pricing: When each person pays an amount equal to their marginal benefit. ◦ The government provides the public good and finances its provision through each person paying what it is worth to them Examples International View ◦ When Iraq invaded Kuwait in 1990, which countries were at risk? ◦ Estimates of the cost of the war = $61 billion ◦ $54 billion came from other nations $17 billion from Saudi Arabia $16 billion from Kuwait $11 billion from Japan ◦ US left with $7 billion of the incremental costs of fighting the war. How is this like a Lindahl equilibrium? PROBLEM: ◦ If people know that they are required to pay a share of the cost of a public good dependent on their marginal benefits, they have an incentive to understate their true marginal benefits. The Free Rider Problem Def – A person who seeks to enjoy the benefits of a public good without contributing anything to the cost of financing. This strategy almost guarantees that the equilibrium amount of a pure public good will be less than the efficient amount. Problem becomes more acute in large groups where a free rider reasons that their contribution is less likely to be needed or missed Our government provides lots of public goods, how do they overcome the free rider problem? ANS: Compulsory finance! Taxes! Examples WNYC has an estimated listening audience of 1 million people, but only 7.5% of their listeners support the station. In the United Kingdom, the BBC charges an annual licensing fee to anyone who owns and operates a TV.
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