Economic Assignment(12 hours)

The chapter illuminates the distinction between public and private goods. The text defines a public good as one for which excluding an individual from consuming it is neither feasible nor desirable. Exclusion is not feasible by the nature of the good, as in the case of national defense. Exclusion

is not desirable because the marginal cost of allowing another person to consume existing units of a public good is zero; that is, there is nonrival consumption. A private good is one for which the marginal cost of extending services to another customer is greater than zero and for which exclusion is feasible. Market failures associated with public goods are identified as underconsumption and undersupply. In light of the nonrival consumption and nonexcludable nature of pure public goods, government financing is the most reasonable method of paying for the goods. The free rider problem is then discussed. The chapter stresses the existence of many intermediate cases (referred to as “impure public goods”) that lies in between the extreme cases of pure public and pure private goods. Public goods are not to be confused with publicly provided private goods, which are dealt with at some length. In addition, there are further delineations of public goods: some are enjoyed locally (local public goods), and others benefit anyone in the world (global public goods). Methods of rationing publicly provided private goods, such as user charges, uniform provision, or queuing, are considered.

The chapter approaches the efficient level of public goods provision in three ways: first, by equating the sum of marginal rates of substitution with the marginal rate of transformation; second, by deriving a collective demand curve for public goods through the vertical summation of individual demand curves; and third, by using indifference curve analysis to construct a leftover curve of a Pareto efficient level of public goods provision, as demonstrated in the chapter Appendix. The book takes care to note that the efficient level of provision depends on the income distribution.

Efficient provision of public goods also depends on the extent to which public goods are financed through distortionary taxation. The concepts of physical rates of transformation and production possibilities curves, presented earlier, are contrasted with the analogous concepts of economic rates of transformation and feasibility curves when the effect of distortionary taxation is taken into account.

The chapter concludes by pointing out that the political environment, and in particular, the efficiency with which the government is run, is also a public good. The public good nature of efficient government suggests that it will be underprovided since politicians who might institute efficiency enhancing reforms will not be able to personally reap the full benefit of their efforts.