• Some examples of public goods are National defense, Homeland Security, and Education. • Homeland Security – is a new department that includes the departments of Justice, Transportation, Treasury, Agriculture, Energy, Health and Human Services, and Commerce. • Education has some characteristics of a public good and some characteristics of a private good.
10 Demand for a Pure Private Good Versus a Pure Public Good: • The market demand for a pure private good is derived by adding quantities demanded by each consumer at each possible market price. • The market demand for a private good is obtained by summing up the quantities demanded by each consumer at each possible price level, or by summing up the demand curves as illustrated in slides 11 and 12 below.
11 Derivation of the demand for Pure Private Good
12 Demand For a Private Good Price per Loaf of Bread (Dollars) Loaves of Bread Purchased per Week 7 6 5 4 3 2 1 0 1 2 3 4 5 9 10 6 8 7 E S = MC = AC D C = MB C D B = MB A D A = MB A D = Σ Q D
13 Derivation of the Demand for a Public Good • In the case of a public good, consumers cannot individually determine their consumption levels. All must consume the same quantity of the good. • The market demand for a pure public good is thus derived by adding how much people would be willing to pay for each level of quantity. • Efficient output of the public good is produced when the sum of the individual marginal benefits (∑MBi) equals the MSC.
Derivation of the Demand for a Public Good • In the example illustrated in the diagram below, company A is willing to pay $300, company B is willing to pay $250, and company C is willing to pay $200 per week for 1 security guard. • For 2 security guards, company A is willing to pay $250, company B is willing to pay $200, and company C is willing to pay $150. • The market price for 1 security guard is indicated by Z 1 , which equals ∑MBi = 300 + 250 + 200 = $750, and the market price for 2 security guards is shown by Z 2 , which equals ∑MBi = 250 + 200 + 150 = $600.
- Fall '11
- Public Good, Externality