Public Goods

Public Goods - Public Goods Until recently we have dealt...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Public Goods Until recently we have dealt exclusively with private goods. Private goods have the property of being rival in consumption and excludable x Rival in consumption –consumption by consumer does not reduce the amount that other consumers can consume x Excludable – it is possible to preclude someone from consuming a private good. As the table below shows there are other types of goods Rival in consumption Nonrival in consumption Excludable Private goods x Candy bar x Pencil x Personal computers Artificially scarce goods x Pay per view events x Computer software Non-excludable Common resources x Clean water x Fisheries x Public goods x Public sanitation x Defense
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Public good – a good or service that can be consumed simultaneously by everyone for which no one can be excluded Public goods have two properties o nonrival – consumption by one person does not decrease consumption by another person o nonexcludable – it is not possible to preclude someone from consuming the good. Public (non cable) is an example of a public good Cable television is not a public good because it is excludable. That is the cable company can keep you from watching cable TV without paying. The presence of public goods creates the free rider problem. Free rider – a person who consumes a good without paying for it Public goods create a free rider problem because a person can consume the good without paying.
Background image of page 2
3 Example: Two stores share a small mall. One store sells electronics and the other store sells ice cream. The stores must consider how much theft preventing security to have at a cost of $10 per security unit. Assume that from the perspective of the firms mall security services are non-rival and non-excludable. Electronics Store Ice Cream Shop Q Marginal Benefit Marginal Cost Marginal Benefit Marginal Cost Marginal Social Benefit 1 $25 $10 $11 $10 $36 2 $18 $10 $9 $10 $27 3 $12 $10 $8 $10 $20 4 $7 $10 $7 $10 $14 5 $5 $10 $6 $10 $11 6 $1 $10 $1 $10 $2 We can think of the demand curve as the marginal benefit curve and visa versa. Typically we would sum these curves up horizontally across firms and individuals to come up with a marginal social benefit curve (the industry demand curve). Because the mall security is a public good, once a security guard is hired both stores benefit equally. For this reason we sum up the marginal benefit curves vertically to arrive at the marginal social benefit curve
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Competitive Outcome: If each firm acted like a competitor, adding security units as long as the marginal benefits exceed the costs, then the electronics store would hire 3 security units and the ice cream shop would hire one. Socially Efficient Outcome:
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/14/2011 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at Wisconsin.

Page1 / 15

Public Goods - Public Goods Until recently we have dealt...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online