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Unformatted text preview: Lecture 30: Public Goods. c & 2008 Je/rey A. Miron Outline 1. Introduction 2. When to Provide a Public Good 3. Private Provision of the Public Good 4. Di/erent Levels of the Public Good 5. The Free-Rider Problem 1 Introduction In this lecture we continue our discussion of economic stiutations in which market outcomes are not necessarily Pareto e¢ cient and in which government intervention potentially improves e¢ ciency. We have so far considered externalities, namely, situations in which the actions of one economic agent a/ect the utility or production possibilities of another agent through a channel other than market prices. Noise and water pollution are standard examples. The discussion last time showed that while the presence of externalities means that market outcomes are not necessarily Pareto e¢ cient, private markets can still achieve Pareto e¢ cient outcomes if the property rights are well-de&ned and bar- gaining or other transaction costs are minimal. Moreover, if income e/ects are absent, the amount of the externality generated by private bargaining solutions is independent of the initial assignment of property rights. These results are interesting from a theoretical perspective and important from a practical perspective in many instances. The key lesson for designing economic policy is that assigning property rights enhances e¢ ciency. This approach has played a signi&cant role in diminishing the negative impact of externalities. For example, 1 fences have been used to delineate private property and solve the tragedy of the commons in many instances. A recent innovation along these lines is farm-raised &sh and shell-&sh. We next want to think about when the property rights approach fails. One possibility is that transaction costs ¡bargaining costs ¡create an impediment to private, Pareto-improving trades. In the two-person examples considered in the last lecture, two homeowners might fail to bargain over the amount of noise because they speak di/erent languages, because they have some prior history that makes them hate each other, because one or both thinks such bargaining would be immoral, and so on. In the highly simpli&ed world of two-person, textbook examples, however, it is not so plausible that transaction costs or bargaining costs prevent mutually bene&cial trade, at least not when the gains from trade are substantial. Whenever such gains are available, an incentive exists for the two parties to &nd a way to achieve them. The situation becomes more problematic, however, when we consider a situation with more than two participants. Consider as an example the owners of summer cottages around a lake. Two of the owners do not enjoy jet-skis and value quiet; one owner does enjoy jet-skis and does not value quiet....
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This note was uploaded on 09/16/2009 for the course ECONOMICS 1010A taught by Professor Jeffreya.miron during the Fall '09 term at Harvard.
- Fall '09
- Public Good