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Unformatted text preview: C H A P T E R 27 Public Goods For much of the text, we have so far neglected a large category of goods known as public goods. These are goods that can be consumed by more than one person at a time, and their existence is related closely to the topic of externalities that we first covered in Chapter 21. You can see this connection to externalities by simply think- ing of producing a public good for yourself and then noticing that someone else is able to also consume it. You have, in effect, imposed a positive externality on some- one else by producing the public good. Such goods can be exclusionary if it is possi- ble to exclude people from the positive externality, or they can be non-exclusionary if it is not possible to exclude others. And it is when the good is non-exclusionary (such as national defense) that it becomes particularly difficult for markets to be ef- fective providers of such goods. In the larger picture, one of the fundamental points that emerges is the problem faced by voluntary civil society efforts the problem we identify in this Chapter as the free-rider problem. Chapter Highlights The main points of the chapter are: 1. The reason that we would expect public goods to be under-produced (and under-consumed) can be found in the free-rider problem the problem that everyone is tempted to free-ride on the public goods of others. This incentive to free-ride is in fact exactly the incentive modeled in the Prisoners Dilemma (where it is a dominant strategy not to cooperate.) 2. The optimal level of public good output occurs where the sum ofthe marginal benefits ofconsumption is equal to the marginal costofproducing the pub- lic good . This is the same optimality condition that holds at the margin for private goods but the difference is that, with private goods, the sum of the marginal benefits is the same as the marginal benefit to a single consumer. 3. There are essentially three ways to attack the free-rider problem inherent in public goods provision: (1) government provision through taxation or gov- Public Goods 664 ernment subsidies of private contributions; (2) fostering markets partic- ularly for exclusionary public goods; and (3) fostering civil society engage- ment. 4. A fourth possible way to provide public goods efficiently lies in the area of preference revelation mechanisms , but these have not developed to a point where they are widely used. Using the LiveGraphs For an overview of what is contained on the LiveGraphs site for each of the chapters (from Chapter 2 through 29) and how you might utilize this resource, see pages 2-3 of Chapter 1 of this Study Guide . To access the LiveGraphs for Chapter 27, click the Chapter 27 tab on the left side of the LiveGraphs web site....
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- Fall '08