Dr. Aneel Salman Institute of Business Administration Karachi
Production process is same Sale process is different 2
Public Goods are goods for which exclusion is impossible. One example is National Defense: A military that defends its citizenry from invasion does so for the entire public. 3
Positive Externalities Environment Protection, Public Safety etc Market production of such goods whose benefit is shared is difficult Usually people vote to decide the quantity supplied 4
Nonexclusion: The inability of a seller to prevent people from consuming a good when they do not pay for it. Costly/impossible to exclude from use of clean air Possible to exclude from television transmission or road use Nonrivalry: The characteristic that if one person “consumes” a good, another person’s pleasure is not diminished nor is another person prevented from consuming it. Television Transmission 5
Pure Public Good: There is no ability to exclude and there is no rivalry for the benefits. Pure Private Good: There is a clear ability to exclude and there is rivalry for the benefits. The two extremes between which goods can be categorized based on the externalities generated 6
The marginal cost of allowing another person to benefit from a pure public good is zero while the marginal cost of a greater level of public good is positive. Distribution vs Production Costs 7
8 Cost (Dollars) Number of Consumers 0 200 Marginal Cost of Allowing an Additional Person to Consume a Given Quantity of Pure Public Good 1 The marginal cost of allowing an additional person to consume a given quantity of a pure public good falls to zero after it is made available to any one person.
Marginal Cost of Producing a Pure Public Good 9 Units of a Pure Public Good per Year Cost (Dollars) MC = AC 200 0 The marginal cost of producing the good is always positive. In this case, the marginal cost of each extra unit of the good is $200.
A pure public good is not divisible into units that can be apportioned among consumers. A given quantity of a pure public good can only be shared rather than enjoyed individually. Its benefits are collectively consumed by the entire population.
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