Chapter Thirty-Five Public Goods
Chapter Thirty-Five Public Goods
Main Issues Reservation Price Necessary and Sufficient conditions for providing public good to be Pareto Improvement Free Riding Problem Lindahl Equilibrium Demand Revelation
Main Issues Reservation Price Necessary and Sufficient conditions for providing public good to be Pareto Improvement Free Riding Problem Lindahl Equilibrium Demand Revelation
Public Goods -Definition A good is purely public if it is both nonexcludable and nonrival in consumption. -Nonexcludable -all consumers can consume the good. -Nonrival -each consumer can consume all of the good
Public Goods -- Definition A good is purely public if it is both nonexcludable and nonrival in consumption. –Nonexcludable -- all consumers can consume the good. –Nonrival -- each consumer can consume all of the good
Public Goods -Examples Broadcast radio and TV programs National defense. Public highways. Reductions in air pollution. National parks
Public Goods -- Examples Broadcast radio and TV programs. National defense. Public highways. Reductions in air pollution. National parks
Reservation Prices A consumer's reservation price for a unit of a good is his maximum willingness-to-pay for it. Consumer's wealth is w. Utility of not having the good is U(w,0)
Reservation Prices A consumer’s reservation price for a unit of a good is his maximum willingness-to-pay for it. Consumer’s wealth is Utility of not having the good is U(w,0). w
Reservation Prices A consumer's reservation price for a unit of a good is his maximum willingness-to-pay for it. Consumer's wealth is w. Utility of not having the good is U(w,0) Utility of paying p for the good is U(w-p,1)
Reservation Prices A consumer’s reservation price for a unit of a good is his maximum willingness-to-pay for it. Consumer’s wealth is Utility of not having the good is Utility of paying p for the good is U(w,0). w. U(w − p,1)
Reservation Prices A consumer's reservation price for a unit of a good is his maximum willingness-to-pay for it. Consumer's wealth is w. Utility of not having the good is U(w,0). Utility of paying p for the good is U(w-p,1). Reservation price r is defined by U(w,0)=U(w-r,1)
Reservation Prices A consumer’s reservation price for a unit of a good is his maximum willingness-to-pay for it. Consumer’s wealth is Utility of not having the good is Utility of paying p for the good is Reservation price r is defined by U(w,0). w. U(w − p,1). U(w,0) = U(w − r,1)
Reservation Prices;An Example Consumer's utility is U(x1,x2)=x1(x2 +1). Utility of not buying a unit of good 2 is V(w,0)=”(0+1)=w. P1 P1 Utility of buying one unit of good 2 at price p is V(w-p,1)= w-P(1+1)= 2(w-p) P1
Reservation Prices; An Example Consumer’s utility is U(x , x ) x (x ). 1 2 = 1 2 + 1 Utility of not buying a unit of good 2 is V w w p w p ( ,0) (0 1) . 1 1 = + = Utility of buying one unit of good 2 at price p is V w p w p p w p p ( , ) ( ) ( ) − = . − + = − 1 1 1 2 1 1
Reservation Prices;An Example Reservation price r is defined by V(w,0)=V(w-r,1) l.e.by w2(w-r） 之 2
Reservation Prices; An Example Reservation price r is defined by V(w,0) =V(w − r,1) I.e. by w p w r p r w 1 1 2 2 = − = ( )
When Should a Public Good Be Provided? One unit of the good costs c. Two consumers,A and B. Individual payments for providing the public good are ga and gB. gA ge c if the good is to be provided
When Should a Public Good Be Provided? One unit of the good costs c. Two consumers, A and B. Individual payments for providing the public good are gA and gB. gA + gB c if the good is to be provided