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# ch15 - Chapter 15 Public Goods and Tax Policy Monday July...

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Chapter 15: Public Goods and Tax Policy Monday, July 26

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RIVALNESS AND EXCLUDABILITY rival? yes no excludable? yes private good natural monopoly (e.g. cable television) no common resource (e.g. fish in the ocean) public good (e.g. national defense)
INDIVIDUAL BENEFIT AND DEMAND Suppose that I live in a house with 4 other people, and we’re deciding how many paintings to buy for the common room wall. My individual benefit from different numbers of paintings are as given above. If no one else bought any at all, and the price of a painting was \$12, then I’d buy 2 paintings and get a consumer surplus of 12, as shown above. Q TB i MB i 1 21 21 2 36 15 3 46 10 4 52 6 5 55 3 6 56 1 7 56 0 CS = TB TC = 36 2 × 12 = 12 or CS = Σ (MB MC) = (21 12)+(15 12) = 12

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SOCIAL BENEFIT Q TB i MB i TSB MSB 1 21 21 105 105 2 36 15 180 75 3 46 10 230 50 4 52 6 260 30 5 55 3 275 15 6 56 1 280 5 7 56 0 280 0 In that case, multiplying the total benefit that each individual gets from any given number of paintings by 5 will give us a measure of the total social benefit that we get collectively. Likewise, multiplying the marginal benefit by 5 will give a measure of the marginal social benefit that each additional painting produces. Suppose (for simplicity) that all 5 residents of the house have exactly the same benefit-for-paintings schedule as I do. Suppose also that all paintings in the common room are non-rival and non- excludable (which makes sense).
Q TB i MB i TSB MSB 1 21 21 105 105 2 36 15 180 75 3 46 10 230 50 4 52 6 260 30 5 55 3 275 15 6 56 1 280 5 7 56 0 280 0 0 10 20 30 40 50 60 70 80 90 100 110 0 1 2 3 4 5 6 7 quantity price, MB, MC MBi P MSB Non-counting question: If all of us are completely self- interested, and incapable of any kind of collective bargaining, then how many paintings will end up being bought for the house? A) 0 B) 1 C) 2 D) 3 E) 5

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SOCIAL BENEFIT AND PRIVATE DEMAND Q TB i MB i TSB MSB 1 21 21 105 105 2 36 15 180 75 3 46 10 230 50 4 52 6 260 30 5 55 3 275 15 6 56 1 280 5 7 56 0 280 0 When the number of paintings is less than 2, then it is in someone ’s private interest to buy an additional painting. However, the private marginal benefit of the 3 rd painting for anyone (which is \$10) is less than the marginal cost (\$12), so only 2 will be bought. The purple area shows the total consumer surplus for everyone in the house combined, i.e. the total social benefit minus the cost of the paintings, or TSB(2) 2 × 12 = 156.
SOCIALLY OPTIMAL PROVISION Q TB i MB i TSB MSB 1 21 21 105 105 2 36 15 180 75 3 46 10 230 50 4 52 6 260 30 5 55 3 275 15 6 56 1 280 5 7 56 0 280 0 The socially optimal choice of paintings occurs where the marginal social benefit intersects the marginal cost. All paintings have a marginal cost of 12 . The 5 th paintings has a marginal social benefit of 15 , and the 6 th has a marginal benefit of 5 . So, only the first 5 are worth buying.

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GAIN FROM COLLECTIVE ACTION TSB = 180 TC = 2 × 12 = 24 TES = 180 24 = 156 TSB 105 180 230 260 275 280 280 TSB = 275 TC = 5 × 12 = 60 TES = 275 60 = 215 Thus, the gain from collective action (or the deadweight loss from the lack of collective action) is 215 156 = 59.
QUESTION 1 (individual demand) Suppose that I live in a society of 10 people. My individual benefit from a

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ch15 - Chapter 15 Public Goods and Tax Policy Monday July...

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