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Public goods

Public goods. free goods vs scarce goods. Classification of goods. capital goods vs consumer goods. normal goods vs inferior goods vs giffen goods. private goods vs public goods. music. military services. weather forecasting. movie of Stephen Chow. Public goods. Private goods.

Jeffrey
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Public goods

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  1. Public goods

  2. free goods vs scarce goods Classification of goods • capital goods vs consumer goods • normal goods vs inferior goods vs giffen goods • private goods vs public goods

  3. music military services weather forecasting movie of Stephen Chow Public goods Private goods

  4. Private goods: a person’s consumption reduces the amount of the goods available to the others exclusive consumption Public goods: a person’s consumption would not reduce (but may even increase) the amount available to the others shared consumption externality in consumption Differences betweenprivate goods and public goods

  5. 1. A person’s consumption would not prevent the others from consuming the goods. (Non-exclusive consumption) 2. The producer of the goods would not incur additional cost in serving another consumers. (Non-competitive consumption) Features of public goods

  6. public goods and common property a public goods is not necessarily a common property A common mis-coneptionabout public goods

  7. since a public goods is consumed non-exclusively, the marginal use value of a given unit of public goods is the summation of all individuals’ marginal use values vertically. Vertical summation of all individuals’ marginal use value curves. NOT horizontal summation ! How to derive a public good’s market demand curve?

  8. $ $ $ P1 P2 MUVA MUVB P3 0 Q 0 Q 0 Q Horizontal summation – Market demand curve of a private goods MUVmkt • The implication of horizontal summation of individual MUV curves: • When the price is P2, A will buy 3 units while B will buy 5 units. • The total quantity demanded will be 8 units because these 8 units are exclusively consumed by A and B.

  9. $ MUVA 0 Q $ MUVB 0 Q $ 0 Q Vertical summation – Market demand curve of a public goods • At Q2, A is willing to pay $10 while B is willing to pay $8. • The total use value of the Q2th unit in the market will be $18. MUVmkt Q1 Q2 Q3

  10. The market demand curve for a public goods shows the maximum amount of other goods the society as a whole willingly pay for it. The marginal cost of serving additional consumer (not the marginal cost of production) is zero. At equilibrium, MUV = MC, the output should be Q*. $ Dmkt MC 0 Q What is the equilibrium outputof public goods? Q*

  11. At Q*, the price should be zero so that P = MUV = MC. Consumer surplus will be maximized. However, economic rent of producers will be zero. As a result, no production of public goods at all which is NOT a desired result. $ Dmkt CS MC 0 Q Q* What is the equilibrium priceof public goods? P =

  12. Suppose a positive price is set at P1, producers could earn a revenue (or rent) to cover their production costs. Then, consumers will cut their consumption to Q1. Consumer surplus will be smaller. Deadweight loss will appear. $ Dmkt CS TR DWL 0 Q What would happen if P > 0? P1 Q1

  13. When a positive price is set, there will be a ‘free-rider’ problem to producers. The producers could not easily collect fees from the users who claim that they do not consume the goods. What would happen if P > 0? • It is difficult for the owner of lighthouse to collect fees from ship captains.

  14. P > 0: smaller consumer surplus deadweight loss appears free-rider problem smaller social gain A dilemma P = 0: • private production will be discouraged • smaller amount of public goods • smaller social gain Market failure Government provision of public goods

  15. In reality, producers of public goods could adopt various types of pricing method, so as to maximize their gains. $ Dmkt TR MC 0 Q Q* Really market failure? (1) • Suppose the producer adopts per-unit pricing or price discrimination. P1 P2 P3 P4 P5 P6 P7 P8 • Consumer surplus could be captured as rent. No DWL.

  16. $ Dmkt MC 0 Q Q* P = Really market failure? (2) • The producer could charge a lump-sum membership fee or entrance fee and allow customers to consume whatever units until their MUV is zero. lump-sun fee lump-sun fee lump-sun fee lump-sun fee lump-sun fee lump-sun fee lump-sun fee lump-sun fee • When the MUV of the last user is zero, NO DWL.

  17. Really market failure? (3) • TV stations providing free programmes to viewers could earn a lot of income from selling airtime to sponsors. In doing so, viewers indirectly pay for the programmes. • TV stations could also charge viewers money by asking them to install special equipment. In doing so, free-riders could be reduced. • Musicians or movie producers could charge audience entrance fees. The seating arrangement could affect the nature of the public goods.

  18. Private provision of public goods • When transaction costs are low enough, producers of public goods could adopt suitable pricing method(s). The revenue received could be high enough to cover the production costs. • Therefore, government provision of public goods is not necessary. • The idea of ‘market failure’ is not sound.

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