public_goods2-ho_002

public_goods2-ho_002 - Optimal level of public goods Demand...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Optimal level of public goods Demand Revelation Public Goods (cont.) (Chapter 36) Optimal level of public goods Demand Revelation Today • Optimal level of a public-goods provision • Evaluations • Demand revelation: the VCG mechanism Optimal level of public goods Demand Revelation What is the optimal level of public goods provision? • Recall: a non-rival, non-excludable good is a public good • Last time: individuals have incentive to free-ride so market does not provide the efficient level of public goods • If market failure means govt. should provide the public good • How much should it provide (if the quantity is variable)? • Indiv. demand is private—how might govt. actually calculate optimal level? • How do we know much to make each person pay? • Potential solutions: create incentives for people to reveal demand truthfully. ( mechanism design ) • Then govt. knows whether/how much to provide and how should pay how much. Optimal level of public goods Demand Revelation A public good with variable quantity • Suppose there are two goods, x (private, i.e. money) and G (public) • Cost of producing the public good: c ( G ) • Two individuals A and B , with private consumption x A and x B • Budget: x A + x B + c ( G ) = ω A + ω B Optimal level of public goods Demand Revelation A public good with variable quantity • For each person, what is marginal benefit to switching some consumption from private to public good? • MRS A , MRS B • Each person separate equates marginal benefit with marginal cost. • But because G is non-rival, 1 extra unit is fully consumed by both A and B • So condition for socially-optimal (Pareto efficient) provision is MRS A + MRS B = MC ( G ) • More generally: X i MRS i = MC ( G ) Optimal level of public goods Demand Revelation How can we determine efficient provision level?...
View Full Document

This note was uploaded on 12/26/2011 for the course ECON 100B taught by Professor Kilenthong during the Fall '08 term at UCSB.

Page1 / 15

public_goods2-ho_002 - Optimal level of public goods Demand...

This preview shows document pages 1 - 7. Sign up to view the full document.

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