Chapter 4-Public Goods Public economics
1 Chapter 4 - Public Goods Public Economics
Public goods defined Pure public goods share two characteristics Nonrival-Cost of another person consuming the good is zero Nonexcludable -Very expensive to prevent others from consuming the good
2 Public Goods Defined • Pure public goods share two characteristics – Nonrival – Cost of another person consuming the good is zero – Nonexcludable – Very expensive to prevent others from consuming the good
Examples of public and private goods Public Goods Private goods National defense zza House cleaning in an Health care apartment with many roommates Congested freeway Public housing Fireworks display Music file sharing Uncongested freeway
3 Examples of public and private goods • Public Goods – National defense – House cleaning in an apartment with many roommates – Fireworks display – Music file sharing – Uncongested freeway • Private goods – Pizza – Health care – Congested freeway – Public housing
Valuation of public goods Everyone consumes same quantity of public good Marginal benefit of public good varies by person In the housecleaning example, different roommates value the clean apartment differently
4 Valuation of public goods • Everyone consumes same quantity of public good • Marginal benefit of public good varies by person – In the housecleaning example, different roommates value the clean apartment differently
Impure public goods Most goods that are thought of as public goods may not strictly satisfy the nonrival or nonexcludable assumption A scenic view is a public good without congestion, but the quality diminishes as more the number of sightseers increases Thus a scenic view becomes rival
5 Impure public goods • Most goods that are thought of as public goods may not strictly satisfy the nonrival or nonexcludable assumption. – A scenic view is a public good without congestion, but the quality diminishes as more the number of sightseers increases. – Thus, a scenic view becomes rival
Private goods can be provided by the public sector These are called publicly provided private goos.” Key criteria: is the good rival and excludable? Public housing is rival (one family consumes one apartment) and excludable (easy to prevent consumption)
6 Private goods can be provided by the public sector • These are called “publicly provided private goods.” • Key criteria: is the good rival and excludable? • Public housing is rival (one family consumes one apartment) and excludable (easy to prevent consumption)
Efficient provision of private goods Derivation of aggregate demand Each person,s demand curve represents the willingness-to-pay for an additional unit of a good Private good: holding P constant, add together individual quantities to get Q Horizonta summation
7 Efficient provision of private goods • Derivation of aggregate demand • Each person’s demand curve represents the willingness-to-pay for an additional unit of a good. • Private good: holding P constant, add together individual quantities to get Q. • Horizontal summation
Figure 4.1 +E D D f per year f per year f per year
Figure 4.1
Equilibrium in private goods market Equilibrium where supply curve intersects aggregate demand curve Everyone pays the same price, P Individuals consume different quantities · Pareto efficient
9 Equilibrium in private goods market • Equilibrium where supply curve intersects aggregate demand curve. • Everyone pays the same price, P. • Individuals consume different quantities, Q. • Pareto efficient
Efficient provision of public goods Consider a fireworks display as a public good it is nonrival and nonexcludable Bigger displays give higher benefit Public good: holding Q constant, add together individual willingness-to-pay to get P · Vertical summation 10
10 Efficient provision of public goods • Consider a fireworks display as a public good – it is nonrival and nonexcludable. • Bigger displays give higher benefit. • Public good: holding Q constant, add together individual willingness-to-pay to get P. • Vertical summation
