Lecture 27 - Econ 201 Lecture 27 Public Goods Public goods...

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Econ 201 Lecture 27 Public Goods Public goods are those goods or services that possess, in varying degrees, the properties of nondiminishability and nonexcludability . Nondiminishability: any one person's consumption of a public good has no effect on the amount of it available for others. Examples: WVBR's radio signal National defense Nonexcludability: it is either impossible, or prohibitively costly, to exclude non-payers from consuming the good. Examples: WVBR's radio signal National defense Goods that have high degrees of both of these properties are often called pure public goods , like the radio and defense examples given. Goods that have only the nondiminishability property are sometimes referred to as collective goods . Example: Pay-per-view TV programs Collective goods are sometimes provided by government, sometimes by private companies. Most pure public goods are provided by government, but as in the case of the radio example, profit-seeking companies often find ways to provide them. Example 27.1 . Jones and Smith are the only two residents of their village. There is a security device that will alert them to the presence of trespassers on their respective properties, which are contiguous. The cost of the device is $100. Its value to Jones, who is poor, is $30; its value to Smith, who is rich, is $90. Would either person be willing to purchase the device individually? No. Its cost is higher than the value to either individual. Example 27.2 . Is it efficient for the two together to purchase it? Yes because its total value ($120) exceeds its cost ($100). Unfortunately, it is often impractical for private citizens to negotiate for the joint purchase of goods or services. This is especially likely when large numbers of people are involved: Communications costs The free-rider problem: each individual's contribution is an insignificant part of the total required. Each thus has an incentive to hold back in the hope that others will contribute. Bargaining problems. Even when only few people are involved, it may be difficult to reach agreement on what constitutes a fair sharing of the total expense. When these problems arise, governments may use tax revenues to buy public goods on the public's behalf. Even when government acts as the public's purchasing agent, political agreement must be reached on how public purchases are to be financed. Example 27.3 . Suppose there is a "government" in charge of providing the security device of Example 27.1. Suppose also that the government is not empowered to collect more in tax revenues from any one citizen it does from any other. If citizens must approve all government spending projects by majority vote, will this government be able to provide the security device that Smith and Jones want? If the government must tax all citizens equally, it would have to raise $50 from Smith and $50 from Jones.
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This note was uploaded on 12/24/2011 for the course ECON 201 taught by Professor Staff during the Spring '08 term at Oregon State.

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Lecture 27 - Econ 201 Lecture 27 Public Goods Public goods...

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