Professional Documents
Culture Documents
ECO 2110A
University of Ottawa
4. Public Goods
[Ch. 4]
Rosen, Wen and Snoddon
McGraw-Hill Ryerson, 5th Canadian edition,
Learning Objectives
1. Describe the characteristics of public goods.
2. Explain why the private provision of public
goods is unlikely to be efficient.
3. Derive the condition for an efficient provision of
public goods.
4. Summarize the procedure of perfect price
discrimination for financing a public good.
4-2
4-3
Key Focus
Definition of public goods
Efficient provision of public goods
Efficiency condition
Providing public goods financed by distortionary taxes
Difficulties in achieving efficiency
Free-rider problem
The privatization debate
Public versus public provision
Private versus public production
Public goods and public choice
4
Characteristics of Goods
Excludable vs. Nonexcludable
Excludable preventing anyone from
consuming the good is relatively easy
Nonexcludable preventing anyone from
consuming the good is either very expensive or
impossible
Excludable In Use?
Rival In Use?
Yes
No
Yes
2. Natural Monopolies
Fire Protection
Cable TV
Uncongested Toll Highways
No
3. Common Resources
Fish in the oceans
Environment
Highly Congested Free
Highways
2. Public good
can be consumed simultaneously by everyone and
from which no one can be excluded
Non rival and non excludable
Pure public good: no exclusion possible
Scenic area viewed by few people
Basic research
Programs to fight poverty
Uncongested non-toll roads
Fireworks display
National Defense
4-9
10
4-11
D1
24
Q1
(a)
24
D1
9
36
Q2
(b)
Price ($/unit)
18
Price ($/unit)
Price ($/unit)
60
Q = Q1 + Q2
(c)
Adam
(DfA)
Eve
(DfA)
Market
(DfA+E)
$11
5+1=6
$9
7+3=10
$7
14
$5
11
18
$3
13
22
$1
15
11
26
13
Twice as many households would watch the program if its price were zero
instead of $10. The additional economic surplus is the area of the blue
triangle, or $50 million.
Ch14 -14
MRSfa = Pf/Pa
Set Pa = $1
MRSfa = Pf
DfA shows MRSfa for Adam
DfE shows MRSfa for Eve
Sf shows MRTfa
Necessary condition for Pareto efficiency:
MRSfaAdam = MRSfaEve = MRTfa
. f= figs and a = apples
15
Price
($/unit)
18
9
D1
12
24
36
Q1
(a)
Price
($/unit)
24
16
D2
8
12
24
36
Q2
(b)
Price
($/unit)
42
D = D1 + D2
25
8
12
24
36
(c)
Ch14 -16
Efficient Provision of a
Public Good
At Q=20 units, total WTP = $4+$6 = $10
17
Citizen B
Citizen C
Price
($)
Quantity
Demanded
Price
($)
Quantity
Demanded
Price
($)
Quantity
Demanded
10
20
10
Market: (A + B + C)
Price
($)
Quantity
Demanded
10
30
10
20
40
20
40
20
50
30
70
30
60
40
100
40
70
50
130
50
80
60
160
190
18
Citizen B
Citizen C
Price
($)
Quantity
Demanded
Price
($)
Quantity
Demanded
Price
($)
Quantity
Demanded
10
20
30
10
20
Market: (A + B + C)
Quantity
Willingness to
pay
10
19
10
20
16
40
20
30
13
50
30
40
10
30
60
40
50
40
70
50
60
50
80
60
70
80
19
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 (public good):
MRSfaAdam + MRSfaEve = MRTfa
Compare to the necessary condition for Pareto efficiency
(private good):
MRSfaAdam = MRSfaEve = MRTfa
21
Efficiency: A Summary
Public goods
MSB (of society from the good) = MSC
MSB = marginal social benefit of all individuals
from the consumption of a public good
MSC = marginal social cost (total cost of
production)
Private goods
MBPaul = MBMary= MC
MB = marginal private benefit from the
consumption of a private good
MC = marginal private cost of production
22
23
Warm-glow giving
4-27
LO5, LO6
4-28
Public Goods
Price
Total Benefit
Maximu
m
Net
Production Cost
Benefit
Optimal Output
Quantity
29
Marginal
cost
200
140
80
Demand
A0
A*
31
Distributional Issues
Commodity egalitarianism
James Tobin 1970
notion that some commodities ought to
be made available to everyone
Health care? Education?
34
Ch14 -35
37
Equity
equality of opportunity
40
Chapter 4 Summary
Public goods are characterized by nonrivalness and
nonexcludability in consumption. Thus, each person consumes
the same amount, but not necessarily the preferred amount, of the
public good.
With lump-sum taxation, efficient provision of public goods
requires that the sum of individuals MRSs equal the MRT, unlike
private goods where each MRS equals the MRT. Equivalently,
the sum of the individuals marginal benefits equals the marginal
cost of production with the efficient provision of a public good.
With distortionary taxation, efficient provision of public goods
requires that the sum of the individuals marginal benefits equal
the marginal cost of financing the provision of an additional unit of
the public good. This is equal to the marginal cost of public funds
times the difference between the marginal cost of producing the
public good and the additional revenue that is generated when an
additional unit of the public good is provided.
4-41
Exercise
In the jungle, Tarzan and Jane have trained Cheetah to
patrol their clearing and to harvest fruit.
Cheetah
can collect 3 kilos of fruit per hour and
spends
6 hours patrolling
8 hours picking fruit
10 hours sleeping.
Exercise
Cheetah
Assume that Cheetahs utility does not enter the social welfare
function; hence, her allocation of labor supply across activities
does not matter.
can collect 3 kilos of fruit per hour and
patrols 6 hrs; picks fruit 8 hrs; sleeps 10 hrs (= 24 hrs).
a. What are the public and public goods?
Patrolling = public; picking fruit (for own consumption) =
private
b. If Tarzan and Jane are willing to give up 1 hour of patrol for 2
kilos of fruit, is the allocation of Cheetahs time efficient?
Should Cheetah patrol more? Less?
Exercise
48
1.
2.
3.
53
4. Public Goods
[Ch. 4]
Rosen, Wen and Snoddon
McGraw-Hill Ryerson, 5th Canadian edition,