Econ 1: Spring 2016: U.C. Berkeley
Section Exercise for March 16/17: Public
Goods
1) FBAH divide commodities into four boxes, depending on the degree to which they are rival
and excludible. There are, of course, degrees: a good produced with increasing returns to scale,
for example, is not completely non-rival as long as there are some extra variable costs associated
with producing an extra unit. And changes in laws and regulations can affect the degree of
excludability, as can actions individuals can take: you, for example, can make your bicycle less
non-excludible by buying and using a good lock.
Rival and excludible commodities are what FBAH call private goods: for them it is easy to
charge a price for their use (that is the definition of excludibility), it makes sense to charge a
price equal to marginal opportunity cost for their use (because the definition of rivalry is that
using them uses up the resources needed to produce them and so leaves the rest of society
poorer), and charging such a price provides producers with enough incentive that production
continues. Generally, the market provides a good societal outcome for private goods.
Rival and non-excludible commodities are what FBAH call commons goods: they suffer from the
so-called “tragedy of the commons”. Strong government regulation to restrict appropriation and
use through some mechanism is very necessary to produce a good societal outcome for commons
goods.
Non-rival and non-excludible commodities are public goods: they are the proper arena of public
provision by the government, although sometimes but rarely private companies can provide such
public goods by selling some ancillary service or by in some way turning the users of the goods
themselves into a product to be sold.
Econ 1: Spring 2016: U.C. Berkeley
Non-rival and excludible commodities are what FBAH call collective goods: they are the pure
polar case of natural monopoly, and there is a strong argument that they should be provided by
the government. But they can be provided by a private company (usually singular) even without
the existence of some ancillary service or of the ability to turn the users themselves into a
product to be sold.
Classify the commodities listed below. What are they predominantly: private, public, commons,
or collective goods? And if they are not a pure type, add a phrase explaining why and how they
are not a pure type:
1. The Bay Area’s freeway-and-bridge network during rush hours. Mostly a commons good—
but has elements of a private good where there are tolls.
2. The Bay Area’s freeway-and-bridge network during non-rush hour times. Mostly a public
good—but has elements of a collective good where there are tolls.
3. The Los Angeles Area’s freeway network anytime except late at night. Mostly a commons
good—but has elements of a private good where there are tolls.
4. The Interstate Highway System. Mostly a public good—but has elements of a collective
good where there are tolls.
5. Antibiotics. Mostly a collective good—but a public good to the extent that your
antibiotics are very cheap generics.
6. An iPhone. A combination of a private and a collective good—more collective than
private if you think that the marginal cost of making an extra iPhone is only about 1/10
of its retail cost.
7. A loaf of bread. Mostly a private good—but has elements of a collective good given all of
the effort in the past devoted to improving varieties of wheat and experimenting with
different breed recipes.
8. A Mazda Miata. Mostly a private good—but has elements of a collective good given
Mazda’s fixed costs and given Mazda’s ability to draw on the past historical experience
of the auto industry.
9. A Chevy Volt. Mostly a collective good—the key R&D only had to be done once, hence it
is primarily non-rival. But elements of a private good
10. “Kocktails with Khloë [Kardashian]”, a TV show. A public good—with your eyeballs
being sold to advertisers as a collective good for them as buyers and for the Kardashian
clan as sellers.
11. “The Force Awakens”, a first-run Star Wars movie. Mostly a collective good—the
costs of theatre space and of showing the movie are very small.
12. Weather forecasts. Mostly a public good—with, again, some element of your eyeballs
being sold to advertisers as a collective good
13. A college education. A mix of a private and a collective good—but it becomes a
public good to the extent that you can acquire one simply by having around the university
14. A"room"at"the"Claremont"Hotel"for"a"night.2"Private"
15. Electrical power provided by PG&E. Overwhelmingly a collective good."
Econ 1: Spring 2016: U.C. Berkeley
2) Let’s consider the demand for the public good of medical research provided by the NIH.
Suppose that the annual willingness-to-pay for NIH-funded medical researchers by the average
American is:
P = $0.10 - Q/400000
up to 40,000 researchers, and zero thereafter
Where P is the willingness-to-pay and Q is the number of medical researchers funded by the
NIH. There are 300 million Americans
a) Suppose that it costs $1,000,000/year to pay and deploy an NIH medical researcher in a
laboratory. What is the socially-optimal number of medical researchers the NIH should fund?
With 300 million Americans, the total willingness to pay is:
P = $30,000,000 - 750Q
That is equal to the supply of medical researchers P = $1,000,000 at: Q = 38,667
b) What is the consumer surplus generated by the NIH deploying medical researchers at the
appropriate scale? What is the net total surplus?
Since consumers are not paying directly for medical research, CS = AWTP x Q =
($30,000,000 + $1,000,000/2 * 38667 = $599,338,500,000.
Total optimal-scale NIH costs are $38,667,000,000
Net surplus is $560,671,500,000
c) How much is the first medical researcher worth to society?
$30,000,000