Economic Assignment(12 hours)

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Chapter5PublicSector9.12.pptx

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Chapter 5 PUBLIC GOODS AND PUBLICLY PROVIDED PRIVATE GOODS

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Economics of the Public Sector, Fourth Edition

Agenda

Public Goods

Pure & Impure Public Goods

Publicly Provided Private Goods

Efficiency Conditions for Public Goods

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Economics of the Public Sector, Fourth Edition

Public Goods

To distinguish between public & private goods, you should ask two questions:

Does the good have the property of rival consumption?

Is it possible to exclude any individual from the benefits of the public (w/o incurring great costs?)

Rival consumption refers to a good that is used by one person and cannot be used by another person

Non-rival consumption refers to cases in which one person’s consumption does not detract, nor prevent another person’s consumption

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Economics of the Public Sector, Fourth Edition

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Economics of the Public Sector, Fourth Edition

BRIDGES: HOW A USER FEE CAN RESULT IN UNDERCONSUMPTION

If the capacity is large enough, the bridge is a non-rival good. Although it is possible to exclude people from using the bridge by charging a toll, p, this results in an underconsumption of the good, Qe, below the non-toll level of consumption, Qm.

Public Goods

Recall the 2nd question to distinguish public & private goods: Is it possible to exclude any individual from the benefits of the public (w/o incurring great costs?)

This is known as the property of Exclusion

Goods for which there is no rivalry in consumption and for which exclusion is impossible are Pure Public Goods

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Economics of the Public Sector, Fourth Edition

Free Rider

The reluctance of individuals to contribute voluntarily to the support of public goods is referred to as the Free Rider problem

Volunteer fire departments

Public TV

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Economics of the Public Sector, Fourth Edition

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Economics of the Public Sector, Fourth Edition

PUBLICLY PROVIDED GOODS

Pure public goods are characterized by non-rival consumption (the marginal cost of an additional individual’s enjoying the good is zero) and non-excludability (the cost of excluding an individual from enjoying the good is prohibitively high). Goods provided by the public sector differ in the extent to which they have these two properties.

Pure & Impure Public Goods

Global and local public goods refer to goods that offer benefits to anyone in the world

Environment

Health

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Economics of the Public Sector, Fourth Edition

Publicly Provided Private Goods

Publicly provided goods for which there is a large marginal cost associated with supplying individuals are referred to as Publicly Provided Private Goods

Education

Water

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Economics of the Public Sector, Fourth Edition

Publicly Provided Private Goods

Three methods of rationing publicly provided goods

Rationing Devices	Description
User charges/fees	Pro’s - Beneficiaries bear cost Con’s - Results in under consumption Transaction costs
Uniform provision	Pro’s – Saves transaction costs Con’s – Hi demanders may supplement public consumption
Queing	Pro’s – Goods not allocated on wealth Con’s – Time is wasted

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Economics of the Public Sector, Fourth Edition

Efficiency Conditions for Public Goods

A Feasibility Curve refers to giving the maximum level of private-good consumption consistent with each level of public goods for a given tax system

Efficient production requires that the wum of the marginal rates of substitution equal the marginal rate of transformation

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Economics of the Public Sector, Fourth Edition

Publicly Provided Goods

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Economics of the Public Sector, Fourth Edition