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CHAPTER 4. Public Goods. 0. Characteristics of Goods. Excludable v Nonexcludable Excludable – preventing anyone from consuming the good is relatively easy Nonexcludable – preventing anyone from consuming the good is either very expensive or impossible Rival v Nonrival

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Chapter 4

CHAPTER 4

Public Goods


Characteristics of goods

0

Characteristics of Goods

  • Excludable v Nonexcludable

    • Excludable – preventing anyone from consuming the good is relatively easy

    • Nonexcludable – preventing anyone from consuming the good is either very expensive or impossible

  • Rival v Nonrival

    • Rival – once provided, the additional resource cost of another person consuming the good is positive

    • Nonrival – once provided, the additional resource cost of another person consuming the good is zero


Types of goods
Types of Goods

NATURAL

MONOPOLY

PRIVATEGOODS

COMMONRESOURCES

PUBLICGOODS


Noteworthy aspects of public goods
Noteworthy Aspects of Public Goods

  • Even though everyone consumes the same quantity of the good, it need not be valued equally by all

  • Classification as a public good is not absolute; it depends on market conditions and the state of technology

    • impure public good

  • A commodity can satisfy one part of the definition of a public good but not the other

  • Some things that are not conventionally thought of as commodities have public good characteristics

  • Private goods are not necessarily provided exclusively by the private sector

    • publicly provided private goods

  • Public provision of a good does not necessarily mean that it is also produced by the public sector


Some other public goods
Some Other Public Goods

  • Basic research

  • Programs to fight poverty

  • Uncongested nontoll roads

  • Fireworks display


Efficient provision of private goods

0

Efficient Provision of Private Goods


$

0

Sf

DfA+E

DfA

DfE

Quantity of Pizza


Pareto efficiency private goods case
Pareto Efficiency – Private Goods Case

  • MRSpa = Pf/Pa

  • Set Pa = $1

  • MRSpa = Pp

  • DpA shows MRSpa for Adam

  • DpE shows MRSpa for Eve

  • Sp shows MRTpa

  • Necessary condition for Pareto efficiency: MRSpaAdam = MRSpaEve = MRTpa


Efficient provision of public goods

0

Efficient Provision of Public Goods


$

0

Sr

DrA+E

DrA

DrE

Quantity of Fireworks


Pareto efficiency public goods case
Pareto Efficiency – Public Goods Case

  • 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


Problems achieving efficiency

0

Problems Achieving Efficiency

  • The Free-Rider Problem

  • Solutions to the free-rider problem

    • Perfect price discrimination

  • Policy Perspective: Global Positioning System

  • Do people free ride?


Laboratory experiments and free riding
Laboratory Experiments and Free-Riding

  • How a typical experiment works

  • Typical results

    • People contribute about 50% of resources to provision of public good

    • Contributions fall the more often the game is repeated

    • Cooperation fostered by prior communication

    • Contribution rates decline when opportunity cost of giving goes up

  • “Warm-glow” giving


The privatization debate
The Privatization Debate

  • Privatization – taking services supplied by government and turning them over to the private sector

  • Public v Private Provision: What is the right mix?

    • Relative wage and materials costs

    • Administrative costs

    • Diversity of tastes


Distributional issues
Distributional Issues

  • Commodity egalitarianism – notion that some commodities ought to be made available to everyone


Public versus private production
Public versus Private Production

  • Efficiency of private production

  • Problems in comparing cost differences

  • Incomplete Contracts

  • Competition to supply good or service

  • Reputation building

  • Policy Perspective: Should airport security be produced publicly or privately?

  • Market Environment


Preference revelation mechanisms
Preference Revelation Mechanisms

  • ∆TEve = MRTra – (MRSraTotal – MRSraEve)

  • Eve’s choice: ∆TEve = MRSraEve

  • By substitution: MRTra – (MRSraTotal – MRSraEve) = MRSraEve

  • Add (MRSraTotal – MRSraEve) to both sides: MRTra = MRSraTotal


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