Public Goods 2 - PAM2040 Public Goods Intro to Income...

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PAM2040 Public Goods Intro to Income Distribution
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This Week Finish Public Goods Begin “Welfare” Economics Programs aimed at reducing poverty
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Individual to Market: Public Goods S f Q f P f D J D B 20 4 6 10 45
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Why can’t the market reach (45,6)? Can we charge tickets to see the fireworks? Market efficiency requires that Price = Marginal Cost of providing one more unit of consumption Equals what? How do we know that Bob is willing to pay 1.50 and Judy is willing to pay 4.50 for 45 fireworks? Free rider problem Avoided with price discrimination if excludable
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Can the market provide public goods? Unequal valuation (see graph) Altruism “Warm Glow”
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Indirect Effects of Gov’t Provision Suppose Bob and Judy were each providing $10 worth of fireworks, but market optimum is $30 Gov’t levies $5 tax, buys 10 more fireworks Bob and Judy optimally reduce their fireworks expenditure by $5 Crowd out
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Conditions limiting crowd out One party originally spending nothing Altruism / “warm glow”
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Public Good Example Bach and Mozart each consume outdoor concerts (C) and sandwiches (S) Ui=3Ln(Si)+Ln(C)
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Public Goods 2 - PAM2040 Public Goods Intro to Income...

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