econ 306 public goods

econ 306 public goods - The intellectual context in which...

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The intellectual context in which the theory emerged (more like a summary of public goods) Public Goods are those that benefit all consumers, such as national defense. A public good will be undersupplied by a market when consumers cannot be excluded from sharing in its benefits and thus have no incentive to pay for its production. What are Public Goods? Economists define a public good by the characteristics of the good itself. Two are important: nonrival consumption and nonexclusion. A good is nonrival in consumption if, with a given level of production, consumption by one person need not diminish the quantity consumed by others. In effect, nonrival consumption means potential simultaneous consumption of a good by many persons. Nonexclusion means that confining a good’s benefits (once produced) to selected persons is impossible, or prohibitively costly. Thus, a person can benefit fro ma good’s production regardless of whether he or she pays for it. Nonrivalry means that consumption by one person need not interfere with consumption of others; although a good may be nonrival in consumption, restricting consumption to selected persons may still be possible. A good that is nonrival in consumption and has high exclusion costs creates problems for a market system. Once a good is produced, many people will automatically benefit regardless of whether they pay for it, because they cannot be excluded. Free Rider Problem Free rider is a consumer who has an incentive to underestimate the value of a good in order to secure its benefits at a lower, or zero, cost. Viewing the provision of public goods as a prisoner’s dilemma, free riding is the
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This note was uploaded on 11/29/2010 for the course SOM 306 taught by Professor Shruti during the Spring '10 term at George Mason.

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econ 306 public goods - The intellectual context in which...

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