Lecture14-1

Lecture14-1 - ECON 301 LECTURE #14 PUBLIC GOODS We want to...

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1 ECON 301 – LECTURE #14 PUBLIC GOODS We want to introduce the concept of public goods into the theory of welfare economics. The economic theory that we have studied so far deals exclusively with private goods (i.e. goods that are privately owned by agents in the economy. The existence of public goods in the real world requires important modifications with respect to the way we conduct our economic analysis and with respect to the final welfare results. PUBLIC VS PRIVATE So what is the difference between private and public goods? Pure public goods (or just public goods for short) and private goods are two ends of the entire spectrum of goods. [Regular private goods] ! [Pure public goods] PRIVATE GOODS PUBLIC GOODS Private goods are characterized by Public goods are characterized by private ownership and consumption public ownership and consumption which basically exclude the joint owner- which do not exclude the joint owner ship and consumption of the good (i.e. -ship and consumption of the good exludability, rivalrous ). (i.e. non-exludability, non-rivalrous ). When private goods are owned or consumed Public goods can be owned or cons- by their owners, everyone else is barred from umed jointly and equally by all in the owning or consuming those goods. Private economy. (i.e. national security, air goods are the only type of goods we have quality, community fireworks studied thus far. displays, etc.). Of course, there are goods that are categorized somewhere in the middle of the spectrum. These might be referred to as “local public goods” and these are characterized by some combination of features that make them “sort of public, sort of private”. Local Public Goods [Regular private goods] ! [Pure public goods] Although these intermediate goods are not publicly owned (i.e. it costs money to gain entitlement, entrance or membership in order to consume them), they still allow for joint consumption (i.e. every fee paying member can equally and jointly consume the goods). Some examples of these local public goods might include private club membership, local environmental quality, tickets to a concert stadium, etc.
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2 There are three basic economic issues involving public goods: [1] Efficient allocation of public goods We already know that in an economy with private goods only, Pareto Optimal conditions such as, MRS A = MRS B allow us to determine efficient allocations of goods and factors. Now, the issue is: Do these Pareto Optimal conditions still hold in the presence of public goods? [2] Pricing of public goods We also know that in an economy with only private goods, market equilibrium conditions such as Q demanded = Q supplied allow us to determine equilibrium prices and quantities in the markets. Again, the issue at hand is: Do these market equilibrium conditions still hold in the presence of public goods? [3]
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This note was uploaded on 03/28/2010 for the course ECON 301 taught by Professor Coreyvandewaal during the Winter '09 term at Waterloo.

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Lecture14-1 - ECON 301 LECTURE #14 PUBLIC GOODS We want to...

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