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Ch. 4: Public Goods, Rosen and Gayer

The document discusses public goods and their efficient provision. It defines public goods as non-rival and non-excludable, meaning one person's consumption does not reduce availability to others and it is difficult to exclude people from consuming. National defense is given as an example of a public good. The efficient provision of public goods requires vertically summing individual demand curves, as opposed to private goods which are determined by horizontal summation of demands. There is also a discussion of issues with privatizing the production of public goods and criteria for determining when private or public production is preferred.

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181 views

Ch. 4: Public Goods, Rosen and Gayer

The document discusses public goods and their efficient provision. It defines public goods as non-rival and non-excludable, meaning one person's consumption does not reduce availability to others and it is difficult to exclude people from consuming. National defense is given as an example of a public good. The efficient provision of public goods requires vertically summing individual demand curves, as opposed to private goods which are determined by horizontal summation of demands. There is also a discussion of issues with privatizing the production of public goods and criteria for determining when private or public production is preferred.

Uploaded by

Arief Rachman Hakim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Rosench4 1

Ch. 4: Public Goods , Rosen and Gayer

Spring 2007

• National defense is considered a proper function for govt.


• What characteristics make it an appropriate govt responsi-
bility?
• Are there other goods with these characteristics, and should
the government provide them as well?

Public Goods Defined


What is the difference between pizza and national defense?

A pure public good is defined as follows:


• Once provided, the additional resource cost of another per-
son consuming the good is zero, i.e., consumption is non-
rival.
• It is expensive or difficult to exclude anyone from consuming
the good once provided, i.e., it is nonexclusive.
Thus national defense is a public good, and pizza is a private
good ( rival and excludable in consumption).
Rosench4 2
Remarks:
1. Everyone consumes the same quantity (the total) of pure
public goods, although they may not place the same value
(MRS) on that quantity.
2. With private goods, consumers consume different quanti-
ties, but place the same value (MRS) under perfect compe-
tition.
3. Many public goods are impure public goods, i.e., they are
rival or excludable to some extent.
congested streets
beach with excludable access
4. Unconventional public goods: honesty, income distribution,
‘public’ information.
5. There are publicly provided private goods: eg housing and
medical services.
6. Public goods can be provided by the public sector yet pro-
duced by the private sector.
Rosench4 3
1 Efficient Provision of Public Goods

1.1 Private Goods

Begin with private good case. How do we determine the total


quantity of fig leaves demanded by Adam and Eve in a private
market?
• horizontal summation of individual demands
• equilibrium occurs when supply and demand are equal
• at equilibrium, MRSfa = MRSfa = Pf /Pa = MCf /MCa =
MRTfa , which satisfies our condition for private good Pareto
efficiency: MRSfa = MRSfa = MRTfa
Rosench4 4
1.2 Public Good Case

Example: Adam and Eve seek efficient level of fireworks.

• Currently have 19 rockets, which can be increased for $5/rocket


• suppose Adam is willing to pay $6 for an additional rocket
A E
(MRSra = 6), Eve is willing to pay $4 (MRSra = 4).
• Is it efficient to increase the rockets by one?
• yes, if the marginal benefit is at least as big as marginal
cost.
• since they share the benefits of the additional rocket, the
marginal benefit is the sum of their individual benefits,
4+6=10.
• Since the marginal benefit (10) exceeds the marginal cost
(5), the increase is a Pareto improvement.
A E
• Rule for public good efficiency: MRSra +MRSra = MRTra
• Implementation issue: free rider problem
—Eg., Adam claims that he isn’t willing to pay anything
for the 20th rocket.

1.3 Graphical solution

Vertically sum the individual demand curves.


Rosench4 5
2 Privatization Debate: public or private produc-
tion/provision?

Eg: public police force vs private security (according to the The


Economist, 1997, there are three times as many private as pub-
lic police in the US)

What criteria can we use to select private vs public inputs


into the production of public services:
• relative wage and materials costs
but must control for quality—incomplete contracts
• administrative costs
• diversity of tastes
high diversity better served through private provision
• distributional issues
commodity egalitarianism: the idea that some commodi-
ties should be made available to everyone.
Rosench4 6
Application: airport security
post Sept 11, 2001—debate over airport security
options:
1. federal employees
2. public funding, private firms (eg., Israel)
system in place Sept. 11 was funded by airlines
could result in different levels of security at different air-
ports
Result:
TSA established, screeners are federal employees

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