CHAPTER 4
Public Goods
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Characteristics of Goods


Excludable v Nonexcludable

Excludable – preventing anyone from consuming the
good is relatively easy

Nonexcludable – preventing anyone from consuming the
good is either very expensive or impossible
Rival v Nonrival

Rival – once provided, the additional resource cost of
another person consuming the good is positive

Nonrival – once provided, the additional resource cost of
another person consuming the good is zero
4-2
Types of Goods
RIVAL
YES
EXCLUDABLE
YES
NO
PRIVATE
GOODS
NATURAL
MONOPOLY
NO
COMMON
RESOURCES
PUBLIC
GOODS
4-3
Noteworthy Aspects of Public Goods






Even though everyone consumes the same quantity of the
good, it need not be valued equally by all
Classification as a public good is not absolute; it depends on
market conditions and the state of technology
 impure public good
A commodity can satisfy one part of the definition of a public
good but not the other
Some things that are not conventionally thought of as
commodities have public good characteristics
Private goods are not necessarily provided exclusively by the
private sector
 publicly provided private goods
Public provision of a good does not necessarily mean that it is
also produced by the public sector
4-4
Some Other Public Goods

Basic research

Programs to fight poverty

Uncongested nontoll roads

Fireworks display
4-5
Efficient Provision of Private Goods
Price
$11
Adam
(DfA)
5
Eve
(DfA)
1
Market
(DfA+E)
6
$9
7
3
10
$7
9
5
14
$5
11
7
18
$3
13
9
22
$1
15
11
26
4-6
$
12
11
10
Sf
9
8
7
6
5
4
3
DfA+E
2
1
DfE
0
0
1
2
3
4
5
6
7
8
DfA
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Quantity of Pizza4-7
Pareto Efficiency – Private Goods Case







MRSfa = Pf/Pa
Set Pa = $1
MRSfa = Pf
DfA shows MRSfa for Adam
DfE shows MRSfa for Eve
Sf shows MRTfa
Necessary condition for Pareto efficiency:
MRSfaAdam = MRSfaEve = MRTfa
4-8
Efficient Provision of Public Goods
Units of Fireworks
1
2
3
4
Adam (DrA)
$300
$250
$200
$150
Eve (DfE)
Market
(DfA+E)
250
$550
200
$450
150
$350
100
$250
4-9
$
800
750
700
650
600
550
500
450
Sr
400
350
300
250
200
150
DrA+E
DrA
100
50
0
DrE
1
2
3
4
Quantity of Fireworks4-10
Pareto Efficiency – Public Goods Case







MRSfa = Pf/Pa
Set Pa = $1
MRSfa = Pf
DfA shows MRSfa for Adam
DfE shows MRSfa for Eve
Sf shows MRTfa
Necessary condition for Pareto efficiency:
MRSfaAdam + MRSfaEve = MRTfa
4-11
Problems Achieving Efficiency

The Free-Rider Problem

Solutions to the free-rider problem

Perfect price discrimination

Policy Perspective: Global Positioning
System

Do people free ride?
4-12
Laboratory Experiments and Free-Riding

How a typical experiment works

Typical results


People contribute about 50% of resources to provision of
public good

Contributions fall the more often the game is repeated

Cooperation fostered by prior communication

Contribution rates decline when opportunity cost of
giving goes up
“Warm-glow” giving
4-13
The Privatization Debate

Privatization – taking services supplied by
government and turning them over to the
private sector

Public v Private Provision: What is the right
mix?

Relative wage and materials costs

Administrative costs

Diversity of tastes
4-14
Distributional Issues

Commodity egalitarianism – notion that some
commodities ought to be made available to
everyone
4-15
Public versus Private Production







Efficiency of private production
Problems in comparing cost differences
Incomplete Contracts
Competition to supply good or service
Reputation building
Policy Perspective: Should airport security be
produced publicly or privately?
Market Environment
4-16
Preference Revelation Mechanisms

∆TEve = MRTra – (MRSraTotal – MRSraEve)

Eve’s choice: ∆TEve = MRSraEve

By substitution:
MRTra – (MRSraTotal – MRSraEve) = MRSraEve

Add (MRSraTotal – MRSraEve) to both sides:
MRTra = MRSraTotal
4-17