L24
Public Goods
Public Goods -- Definition

Some goods are:
– Nonexcludable (NE): property rights
cannot be enforced.
– Nonrival (NR): all consumers can
simultaneously consume the good.
E
NE
R
NR

A good is public if it is NE and NR
Examples of public goods
 National
defense
 Mathematical formula (basic
Research)
 Broadcast radio and TV programs
 National parks
Park Size: Market Outcome
 Two
agents: A and B
 Pubic good: Park
 A:
Regular consumer
 B:
Park lover
Plan for today
•
2 scenarios:
- Free Markets (Nash Equilibrium)
- Socially optimal outcome
•
Implementation in free markets
A: best response to
A: best response to
B: best response
Equilibrium
 Nash
x1A * , x1B *
Equilibrium:
A*
B*
x
x
- 1 best response to 1
A*
B*
x
- x1 best response to 1
Free riding by A
Nash Equilibrium: x , x  ( 0 , 4 )
B: Creates a park of size 4
A: Does not contribute at all and
uses the park created by B
 Free riding by A
 In
A*
1
B*
1
Free Market Supply
Pareto efficient outcome
 Mayor
U U
A
maximizes welfare of both A and B
U
B
Underprovision of public
•
Under provision of public good
- Unregulated markets
- Efficient size of Park:
•
Public good: positive externality
Socially optimal supply
Implementation of efficient outcome
•
•
•
•
Two problems
- Free riding
- Underprovision of public good
Solution: tax and provide Public Good
(National defense, Parks, Foundational
research)
Problem: Information about valuation
Mechanism design: How to extract
information in the least costly way