14_01_lec35

# 14_01_lec35 - value. The street light will be built if V A...

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1 1 Public Goods 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen December 12, 2007 Lecture 35 Public Goods Outline 1. Chap 18: Public Goods 1 Public Goods Characteristics of public goods: Nonrival. For any given level of production, the marginal cost of providing it to an additional consumer is zero: enjoy it rather than use it up. Nonexclusive. People cannot be excluded from consuming the good. Diﬃcult to charge for its enjoyment. Example (Roads) . Example (Streetlight) . Once streetlight is setup, everyone can see the light (nonexclusive). It is more eﬃcient to have government provide public goods. Government provides and imposes tax. Free-rider problem. Consumer need to pay for public goods, and they tend to understate the value. Example (Streetlight) . Assume cost of building a street light is 1. A’s and B’s reservation values for the street light are both 1, but they are not known by government. Then government asks A and B to announce their

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Unformatted text preview: value. The street light will be built if V A + V B 1 , and people who have value share the cost. Their payoﬀs are shown in Table 1). Therefore, A and B will both announce the value as 0. The result is ineﬃcient: consumers wait for others to pay for the public goods. Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 2 1 Public Goods B Announce Value as 0 Announce Value as 1 Announce Value as 0 0,0 1,0 A Announce Value as 1 0,1 1/2,1/2 Table 1: Payoﬀs of A and B. Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]....
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## This note was uploaded on 11/18/2011 for the course ECON 14.01 taught by Professor Pindyck during the Fall '08 term at MIT.

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14_01_lec35 - value. The street light will be built if V A...

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