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Unformatted text preview: 1 Public Goods: Outline Definition Optimal provision: the LindahlSamuelson condition Public goods games; the free rider problem Public provision and information revelation Voluntary provision and charitable fundraising Public provision through the political process 2 Definition: A Public Good is Nonrivalrous in consumption (i.e. one individuals consumption of the good does not reduce the amount available for consumption by others) Nonexcludable (i.e. when the good is provided, it is impossible to exclude anyone from consuming it) 3 Note the Following Distinctions Pure v. impure public goods Public goods v. publiclyprovided goods Discrete v. continuous public goods provision of a discrete public good is a binary choice (e.g. whether to build a lighthouse or not) a continuous public good can be provided in any quantity (e.g. how much to spend on public radio) 4 Examples What are some examples of public goods? 5 Public Goods: Outline Definition Optimal provision: the Lindahl Samuelson condition Public goods games; the free rider problem Voluntary provision and charitable fundraising Public provision and information revelation Public provision through the political process 6 Optimal Provision How much of a public good should be provided to satisfy the conditions for economic efficiency? The theory of optimal provision can be approached in a number of different ways: Graphically (see Gruber, Ch. 7) Mathematically (see Appendix to Ch. 7)) Through numerical examples 7 Optimal Provision Suppose that the population of a town consists of 2 individuals, A and B Each individual decides how to divide up her wealth between private consumption donations to their local NPR station 8 Optimal Provision Each individual cares about: Her own private consumption The total amount spent on public radio (denoted by G = g A + g B ) Note that $1 donated to public radio increases G by $1, but reduces private consumption by $1 the marginal cost (MC) of (another $1 worth of) public radio is $1 in terms of private goods foregone 9 Optimal Provision Consider the decision facing a benevolent social planner who wants to allocate resources so as to maximize: U A + U B (the sum of As utility and Bs utility) 10 Optimal Provision MU A (G) is the marginal benefit to A from the last dollar spent on public radio MU B (G) is the marginal benefit to B from the last dollar spent on public radio The marginal benefit to society is the sum of these Recall that A and B can simultaneously consume the same public radio broadcast 11 Optimal Provision The optimal level of donations to public radio is given by equating: The sum of marginal benefits to A and B and The marginal cost of donations i.e. MU A (G) + MU B (G) = MC = 1 12 LindahlSamuelson Condition This is the LindahlSamuelson condition for the optimal provision of public goods Alternative formulations:...
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 Spring '08
 Damika
 Public Good

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