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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.

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Classification of goods l.jpg

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


Private goods l.jpg

music

military services

weather forecasting

movie of Stephen Chow

Public goods

Private goods


Differences between private goods and public goods l.jpg

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


Features of public goods l.jpg

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


A common mis coneption about public goods l.jpg

public goods and common property from consuming the goods.

a public goods is not necessarily a common property

A common mis-coneptionabout public goods


How to derive a public good s market demand curve l.jpg

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?


Horizontal summation market demand curve of a private goods l.jpg

$ marginal use value of a given unit of public goods is the summation of all individuals’ marginal use values

$

$

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.


Vertical summation market demand curve of a public goods l.jpg

$ marginal use value of a given unit of public goods is the summation of all individuals’ marginal use values

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


What is the equilibrium output of public goods l.jpg

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*


What is the equilibrium price of public goods l.jpg

At Q*, the amount of other goods the society as a whole willingly pay for itprice 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 =


What would happen if p 0 l.jpg

Suppose a positive price is set at amount of other goods the society as a whole willingly pay for itP1, 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


What would happen if p 013 l.jpg

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.


A dilemma l.jpg

P > 0: ‘free-rider’ problem to producers.

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


Really market failure 1 l.jpg

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.


Really market failure 2 l.jpg

$ types of pricing method, so as to maximize their gains.

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.


Really market failure 3 l.jpg
Really market failure? (3) types of pricing method, so as to maximize their gains.

  • 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.


Private provision of public goods l.jpg
Private provision of public goods types of pricing method, so as to maximize their gains.

  • 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.