SGABCh27 - C H A P T E R 27 Public Goods For much of the...

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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 Prisoner’s 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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This note was uploaded on 11/17/2010 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.

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SGABCh27 - C H A P T E R 27 Public Goods For much of the...

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