Chapter 14 Public Goods

# Chapter 14 Public Goods - Click to edit Master Chapter 14...

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Click to edit Master subtitle style 4/4/11 Chapter 14 Public Goods, Externalities, and Information Asymmetries

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4/4/11 Public Goods Classes of Economic Goods 1) Private Goods 2) Public Goods Private Goods 1. Rival in consumption – the amount consumed by one person is unavailable to be consumed by another person 2. Exclusive in consumption – those who pay for the good get the good 3) Club Goods 4) Open Access Goods
4/4/11 Public Goods cont. Public Goods 1. Nonrival 2. Nonexclusive Once produced everyone is free to consume the good Examples : National Defense, public parks, police protection Marginal cost of additional units is zero

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4/4/11 Public Goods cont. Other Economic Goods Club Goods 1. Nonrival 2. Exclusive Example : any type of membership (Sam’s) Open Access Good 1. Rival 2. Nonexclusive
4/4/11 Public Good Matrix Exclusive Nonexclusi ve Rival Nonrival Private Goods Club Goods Open Access Goods Public Goods Question: How could you turn a public good like a road into a private good? Answer: Make it a toll road

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4/4/11 Optimal Provision of Public Goods Public Goods are provided by the government Why aren’t they provided by the market? What process would we want to carry out to find the “optimal provision” of the public good? Market demand is found through horizontal summation of all individual demand curves Quantity was key in market demand
4/4/11 Optimal Provision cont. S=M C P Q Da Db P a Qa Pb Qb The amount B benefits more from the good Optimal outcome MB = MC Pe Qe Pe and Qe represent the optimal price and output If output is below Qe then MB > MC and we expand production Q: What if output is beyond Qe? Pa is the price A will pay Pb is the price B will pay

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4/4/11 Optimal Provision cont. Q: How do we proportion out the public good? A: Ideally, if you benefit more you should pay more. Look at A and B again. B receives greater benefit (B’s marginal valuation is greater) Once the good is produced, it’s a different story
4/4/11 Free Riding Reaping benefits without paying for them P P P 1 0 5 9 9 9 1 2 1 2 1 2 1 2 1 2 6 Da Db S=M C D=MB Q Q Q

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4/4/11 Table Example Quanti ty Pric e 1 Price 2 Quanti ty Suppli ed 1 \$6 \$8 5 2 5 7 4 3 4 7 3 4 3 6 2 5 3 5 1 Quantity is the quantity of the
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## This note was uploaded on 04/04/2011 for the course ECO 2252 taught by Professor Edward during the Spring '08 term at Troy.

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Chapter 14 Public Goods - Click to edit Master Chapter 14...

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