1. Distinguish between private and public goods?

Private goods
Rival consumption:
One persons consumption affects another persons consumption For ex: cake, ice-cream, clothes, car, bicycle

Public goods
Non-rival consumption:
One persons consumption does not affect another persons consumption -The marginal cost for additional person is zero For ex: park, street, lighthouse, firework, national defense,

Nguyen Kim Lan, MA Lecture of Public economics, FTU kimlanftu@gmail.com 0917766179

Excludability:
individuals can be excluded from enjoying the good unless they pay for it

Non-excludability :
It is hard or impossible to exclude any individual from the benefits of the public goods (free rider problem)

2. Classify public goods

Public goods Pure public goods Non-rival consumption AND nonexcludability Impure public goods Non-rival consumption OR nonexcludability
Rival consumption => Congested goods (bridge, sidewalk, highway) Excludable by the price system Ticket, card to the club, user fee,..

3. Efficient conditions for public goods

Efficient production of public goods occurs at the point of intersection of the demand curve and the supply curve. - The collective demand curve gives the sum of what all individuals are willing to give up, at the margin, to have one more unit of public goods - The supply curves gives the amount of other goods that have to be given up to obtain more unit of the public goods

3. Efficient conditions for public goods

Price Supply curve

3.1. Efficient production of private goods

Price

F
SX

p
Collective demand curve

E1

E2

Dx
DA Quantity 0 qA qB QX Quantity of private goods DB

Horizontal sum of individual demand curves

3.2. Efficient production of public goods

Tax price DG

4. Some issues related to providing public goods

4.1. The free rider problem - Definition: the reluctance of individuals to contribute voluntarily to the support of public goods - Should private sector provide public goods?

Collective demand curve F TG tB E tA DA Quantity of pub goods 0 QG Vertical sum of individual demand curves DB

4. Some issues related to providing public goods

Provide privately Price = MC Provide publicly -Free - Price < MC

4.2. Paying for public goods

- User fee can result in Underconsumption
Price (toll) Demand for trips
Bridge capacity

Welfare loss

Qm Trips not undertaken As a result of charging a toll

Qc

Number of trips taken

4. Some issues related to providing public goods

4.2. Paying for public goods - User fee can result in Underconsumption
Price (toll) Demand curve for trips Marginal cost P1 Pc
Loss when providing freely

4. Some issues related to providing public goods

4.3. Publicity provided private goods - When a private good is freely provided by the Government? - Consequences of providing a private good publicly? Overconsumption of the goods - Methods of rationing publicly provided goods?

Loss when Providing privately

Qc

Qm

Bridge capacity

Number of trips taken

Methods of rationing publicly provided goods

Pirce

Marginal cost of production

Low demander

High demander Q* Q1 Quantity

Q2

Distortions associated with uniform provision

1. Uniform provision Advantage: saves on transaction costs Disadvantage: - Leads some to underconsume, others to overconsume - High demanders may supplement public consumption, increasing total transaction costs 2. Queuing Advantage: Goods (like health care) allocated not necessarily on basis of who is wealthier Disadvantage: - Alternative basis of allocation (who has time to spare) maybe undesirable -Time is wasted