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Unformatted text preview: onditions still hold in the presence of public goods?  Pricing of public goods We also know that in an economy with only private goods, market equilibrium conditions such as Qdemanded = Qsupplied 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?  The free rider problem The non-excludability feature of public goods suggests that it is possible for people to enjoy the full benefits of public goods through joint consumption, without contributing anything to the costs of public goods. So the policy issue is: How do we encourage people to voluntarily contribute to the costs of public goods? SAMUELSON'S ALLOCATION OF PUBLIC GOODS Our first question is answered using Samuelson's theory on the allocation of public goods. Paul Samuelson's contribution to the theory of public goods lies in his innovative formulation of the Pareto Optimal allocation problem of an economy having both public and private goods. Consider an economy with two people, A and B, and two goods, X and Y. Let X be a public good and let Y be a private good. 237 [a] The fact that X is a public good means that we have non-excludability and joint consumption (non-rivalrous consumption) for X which can be formulated analytically as follows: XA = XB = X That is, there are no restrictions on the consumption of X. Not only can person A consume as much of good X as person B but also both people can consume as much of good X as can be produced. [b] On the other hand, the fact that good Y is a private good means that the total amount of good Y allocated to both people A and B must match the total amount of good Y. That is, YA + YB = Y [c] The usual Pareto optimality requirement that no one can be made better off without making someone else worse off can be analytically formulated as the following welfare maximization problem: maximize UB (XB, YB) subject to UA (XA, YA) = A where A is some arbitrary level of utility for consumer A. That is, one person (person B, in this case) can attain the highest level of utility without affecting the utility level of the other person (we have constrained consumer A...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.
- Spring '10