MarketFailure_PublicGoods.pdf - Market Failure(cont’d...

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Market Failure (cont’d) Public Goods Chapters 2 & 4
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3. Public Goods: In the previous lectures, we showed how markets fail to produce efficient amounts of goods, when these goods result in externalities. Many of the goods and services provided by governments, such as national defense and environmental protection, would result in positive externalities if made available for sale to individual buyers in markets, due to the benefits that will definitely be shared by large groups. Goods with benefits that: (i) cannot be withheld from those who do not pay (non-excludable) and (ii) are shared by large groups of consumers with no impact on the size of benefit accruing to any one person (non-rivalry) are public goods .
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Characteristics of Public Goods: 1. Non-rival in consumption: They can be enjoyed by more than one consumer without decreasing the amounts enjoyed by rival consumers. National defense is non-rivalry. When the population of a nation increases, no citizen suffers a reduction in the quantity of national defense because more people are being defended at any time. Thus, Pricing a good that is non-rival in consumption serves no useful purpose. An additional consumer does not reduce the benefit to others. The marginal cost of allowing additional people to consume a given amount of that good is zero (check the next figure). It is therefore inefficient to price non-rival goods.
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2. Non-exclusion This characteristic of public goods means that it is too costly to develop a means of excluding those who refuse to pay from enjoying the benefits of a given quantity of a public good. This implies that it is unfeasible to price units of these goods. For example, it is unfeasible to exclude those who refuse to pay for cleaner air from enjoying the benefits of a given amount of air quality improvement, once it has been supplied for the benefit of other people. Air quality improvement has the property of non-exclusion.
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Types of Goods and their Provision 1. Pure Private Goods: A pure private good is a good that is individually consumed and subject to low-cost exclusion. A pure private good is thus rival in consumption, and its benefits are easily excluded from those who choose not to pay its market price. It can be divided into units that can be enjoyed by single consumers. The more units, of a given amount, are to be consumed by one person, the less units will be available to rival consumers. Example: sugar packs Market exchange for pure private goods results in neither positive nor negative externalities.
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Provision of Pure Private Goods: Are sold in markets either by private firms or government. When sold in markets, their cost of production is financed by the revenue collected from sales to individual buyers.
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  • Spring '10
  • hyman
  • Public Good, Externality, pure public goods

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