Topic 5 ： Public Goods

The Different Kinds Of Goods• When thinking about the various goods in the

economy, it is useful to group them according to two characteristics:– Is the good excludable?– Is the good rival?

• Excludability– Excludability refers to the property of a good where

by a person can be prevented from using it.• Rivalry

– Rivalry refers to the property of a good whereby one person’s use diminishes[di’miniʃ] other people’s use.

• Four Types of Goods– Private Goods– Public Goods– Common Resources– Natural Monopolies

• Private GoodsPrivate Goods– Are both excludable and rival.

• Public GoodsPublic Goods– Are neither excludable nor rival.

• Common ResourcesCommon Resources– Are rival but not excludable.

• Natural MonopoliesNatural Monopolies– Are excludable but not rival.

Four Types of Goods

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Rival?

Yes

Yes

• Ice-cream cones• Clothing• Congested toll roads

• Fire protection• Cable TV• Uncongested toll roads

No

Private Goods Natural Monopolies

No

Excludable?

• Fish in the ocean• The environment• Congested nontoll roads

• Tornado siren• National defense• Uncongested nontoll roads

Common Resources Public Goods

[tɔ:‘ neidəu] 龙卷风

[‘ saiərin] 警报

Characteristics of Public Goods

• Characteristics of Public Goods(figure 5.3)

irrigation 灌溉

Non-rivalry

The Mathematic Definition of Rublic Goods

– The formula of the public goods: – In this formula, every consumer(j ) can con

sume the public goods with total amounts according to his wish, that is, public goods between individuals can not be divided.

xxj

jnjn

(1)Collective Consumption Goods• A collective consumption good is a good for w

hich the consumption by one consumer will not reduce the consumption of any other consumer.(non-rivalry)– a good example is a radio broadcast signal.– ecnomists sometimes call a collective consumptio

n good a public good. – it does not have to be produced in the public sector

of the economy

The Argument for Public Sector Production• Assume that the cable company charges $10 p

er month for a subscriber to receive a movie channel.

• If the subscriber is willing to pay only $5, he will not get the channel.

• The possible social value is reduced by $5.

• It would be possible to set a price so that both the cable company and the viewer would be better off, making a Pareto superior move.

• Because the marginal cost of adding an additional viewer is zero, the social value will be maximized when everyone who places any value at all is allowed to consume it.

• This is argument for financing the goods through tax and distributing it at no cost to anyone who wants it.

The Argument for Private Sector Production• When the movie theater fills up, it takes on mo

re of the characteristics of a private consumption good.

• Seen in this light, many things that appear to be collective consumption goods(uncongested highways serve as a perfect example) may actually be private consumption goods that have been overproduced.

0

Co

st (

Do

llar

s)

Number of Consumers

200

Marginal Cost of Allowing anAdditional Person to Consume aGiven Quantity of Pure Public Good

1

Number of Consumers per Hour 0

Mar

gin

al C

ost

1

Marginal Cost per User

• Yet some goods seem not to be susceptible [sə’septəbl 易受影响的 ] to congestion at all.– Information might provide a good example.– television broadcast signal

• Even in the case in which there is no congestion problem, there still may be a good reason to produce the good in the private sector.– can provide a market signal for efficiently allacatin

g resources– Fg. Consumers can choose from several cable

channels that show music, weather, sports, and so on. If these services were all given away free, producers would have no idea about the value of each service.

The Optimal Output of a Colletive Consumption Goods• Given the special characteristics of a collective

consumption goods, how much of the goods should be produced?

• For a private good, the optimal level of production occurs at the point where the marginal benefits of additional production equal the marginal cost.

• Can the general principle holds for collective consumption goods?– For private goods, the market demand is found by

horizontally( 水平地） summing all the individual demand curves to get the market demand curve.

Efficient Provision of Private Goods

Price Adam (Df

A)Eve (Df

E) Market (Df

A+E)

$11 5 1 6

$9 7 3 10

$7 9 5 14

$5 11 7 18

$3 13 9 22

$1 15 11 26

0

1

2

3

4

5

6

7

8

9

10

11

12

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

DfADfE

DfA+E

Sf

$

Quantity of Pizza

– For collective consumption goods, each unit produced can be consumed by , and is valued by, all consumers.

– Vertical （垂直的） summation of individual demand curves

Efficient Provision of Colletive Consumption Goods

Units of Fireworks

1 2 3 4

Adam (DrA) $300 $250 $200 $150

Eve (DrE) $ 250 $ 200 $ 150 $ 100

Market(Dr

A+E)$550 $450 $350 $250

050

100

150200250300350400

450500550600650

700750800

1 2 3 4

DrA

DrE

DrA+E

Sr

Quantity of Fireworks

$

• Lindahl Pricing– Lindahl prices for public goods are set so that each

individual pays a marginal price equal to the marginal benefit the individual receives from consuming the good.

– Is it unfair?– Is it practical?

(2)Nonexcludability• A good is nonexcludable if once produced, it is

difficult to keep people from consuming the good.

• Free Riders– There is no way to provide some goods and service

s without benefiting everyone.– Households do not have the incentive to pay what t

he item is worth to them.– Free riders understate the value of a good or servic

e so that they can enjoy its benefit without paying for it.

Nonexcludability as a Prisoners' Dilemma

• The prisoners' dilemma [di’lemə](figure 5.2)

BA

Not confess

confess

Not confess

-3 ， -3 -15 ， -1

confess -1 ， -15 -10 ， -10

• Individuals have the incentive to free ride, but they would be better off if they all cooperated to produce the goods.

• When they act in their own narrow self-interests, they end up worse off than if they all had placed the common interest above their own interests.

In competitive markets, individuals pursuing their own self-interests are led by an invisible hand to further

the best interest of the whole society.------Adam Smith. The Wealth

of Nations, 1776

• Nonexcludability tends to be a matter of degree, reflecting how costly it would be to keep people from consuming the goods.

Tolls on highways or on city streets?

Public Policy toward Public Goods• National defense and microcomputer softwar

e share the characteristices of nonexcludable and collective consumption goods.

• Why is notional defense produced in the public sector and microcomputer software produced in the private sector?

???

Case1: Clean Air• Clean Air is a public good

– Nonexclusive and nonrival

• What is the price of clean air?

• Choosing where to live– Study in Boston correlates housing prices with the

quality of air and other characteristics of the houses and their neighborhoods.

• Findings– Amount people are willing to pay for clean air incre

ases substantially as pollution increases.– Higher income earners are willing to pay more (the

gap between the demand curves widen)– National Academy [ə’kædəmi] of Sciences found

that a 10% reduction in auto emissions yielded a benefit of $2 billion---somewhat greater than the cost.

• Government production of a public good is advantageous because the government can assess taxes or fees to pay for it.

• Determining how much of a public good to provide when free riders exist is difficult.

Case 2: Government Intervention in Education

• Does Government Intervention Crowd Out Private Education?

Quantity of Education

Qua

ntity

of

all o

ther

goo

ds

A

B

i

e0ep

ii

x

Private School quantity of education

Public schooling “crowds out”

education

• Does Government Intervention Crowd Out Private Education?

Quantity of Education

Qua

ntity

of

all o

ther

goo

ds

A

B

i

e0 ep

ii

x

Public schooling increases quantity of education

Quantity of Education

Qua

ntity

of

all o

ther

goo

ds

A

B

i

e0ep

ii

x

Public schooling does not increase

quantity of education

• Does Government Intervention Crowd Out Private Education?

Case 3: Lighthouse