PUBLIC GOODS

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PUBLIC GOODS

• PRINCIPLES OF MICROECONOMICS

What is common to many is taken least care of,
for all men have greater regard for what is their
own than for what they posses in common with
others --Aristotle
Dr. Fidel Gonzalez Department of Economics and
Intl. Business Sam Houston State University
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OPPORTUNITY COST
MARGINAL ANALYSIS
Elasticity
Elasticity
SUPPLY
DEMAND
MARKET EQUILIBRIUM
CONSUMER SURPLUS, PRODUCER SURPLUS AND TOTAL
SURPLUS
MARKET EFFICIENCY
MARKET FAILURE
Pigouvian Taxes Quotas Coase Theorem Command and
control
TAXES
EXTERNALITIES
QUOTAS
PUBLIC GOODS
COMMON GOODS
ARTIFICIALLY SCARCE GOODS
GAME THEORY
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THAMES AND THE GREAT STINK
In the mid 1800s London was the biggest city in
the world with a population of about 2 million
people. Most of the waste generated went to the
River Thames making it the most polluted river in
the world. Diseases like Cholera and Typhoid were
common among the people living close to the
Thames. Neighborhoods closer to the Thames had
a death rate from Cholera and Typhoid six time
greater than the neighborhoods farther away. How
nasty was the river check the following cartoons
of newspapers from that time.
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(No Transcript)
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A drop from the Thames
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THAMES AND THE GREAT STINK
In 1858 London suffer a hot summer that produced
a terrible smell from the Thames. The stink was
so bad that the parliament was not able to meet.
This summer was known as the Great Stink After
the Great Stink the government decided to build a
sewage system to alleviate this problem. After
the new sewage system opened, cholera and typhoid
disappear and the average life span of a Londoner
increase by 20 years. The question is Why if
everyone values the sewage system there was not a
private market providing this service
before? The short answer is that the sewage
system is a non-excludable and non-rival service.
We will answer this question in detail in the
upcoming slides.
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TYPES OF GOODS AND SERVICES
We will divide good according to excludability
and rivalry. Excludability a good is excludable
if it is relatively easy to exclude people from
enjoying it. In other words, the property of a
good prevents other people from enjoying
it. Rival the consumption of one unit of the
good or service can not be consumed by someone
else at the same time.
Rival
Non- Rival
Excludable
Non- Excludable
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EXCLUDABILITY AND RIVALRY
Q Why is excludability important? A If you can
not exclude people from enjoying the good then
you can not charge for it. For instance, if there
is a firework display and you can not exclude
people from watching it then you can not charge
for it. If you can not charge for it then there
will be no private supplier willing to supply the
good. The sewage system is non-excludable so it
was impossible to charge for it. Non-excludable
goods tend to be underprovided or not provided at
all. Since everyone benefits no one is willing to
pay for it. Note that these goods are valuable,
so people will really benefit from the good but
no one will pay. Q Why is rivalry important? A
If the good is non-rival that means that the cost
of providing the good to an extra person is zero.
In other words, the private marginal cost is
zero. Since the private marginal cost is zero
then the price charged for any quantity supplied
is zero. No private supplier will be willing to
provide the good. The sewage system is non-rival
so it the private marginal cost was
zero. Non-rival goods suffer from low production
at a higher price.
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PUBLIC GOODS
Public Goods are non-excludable and non-rival,
the private market will not provide enough of
these goods and services.
Imagine a city with only two residents Ted and
Alice
The government wants to decide how many days to
clean up the street. In order to do this the
government asks Ted and Alice their marginal
willingness to pay for an extra day of cleaning.
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PUBLIC GOODS
The condition for the social optimal level of
clean up is the following SMB SMC In this case
since the good is non-excludable and
non-rival SMB PMB ted PMB alice SMC is
determined by the cost of cleaning the street.
Lets assume for simplicity that the social
marginal cost is 22 always.
The social optimal level is four days of cleaning.
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PUBLIC GOODS
The private market will not provide enough of the
good because the marginal cost is 22 and the only
one willing to pay 22 is Ted. The government
needs to tax the residents for the cleaning.
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COMMON GOODS
I talk about these goods in detail in the
externalities slides, but I will mention here
the main ideas. Common goods are non-excludable
and rival. A good example is fish in a lake. In
general, common goods are subject to overuse.
Because the gods is non-excludable the price of
the good is zero, individuals will continue to
consume the good until their marginal benefit is
zero. However, since the good is rival every time
they consume one unit of the good that reduces
the availability of the good to other people. In
this sense, they impose a negative external
effect on other people, but they do not care
about the external effect, people only care about
their private cost and benefit. This is known as
the Tragedy of the Commons. In general, the
tragedy of the commons generates overuse of the
good or service.
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COMMON GOODS
Consider the problem of an open access lake where
people can catch fish. This is non-excludable and
rival. Every time a fisherman catches a fish
imposes a cost on other fishermen by making fish
scarcer. However, the fisherman will only look at
his private marginal cost and private marginal
benefit and total amount of fish caught will be
Qm. The efficient number of fish is Qopt, the
resource is being overused.
Social Marginal Cost PMC external cost

• We solve this problem by
• Taxes
• Quotas
• Private Solution (assign rights)

P
SPMC
Popt
Pm
DMB
Fish caught
Qm
Qopt
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COMMON GOODS
Common goods helps us explain why people that go
to all-you-can-eat buffette tend to overeat, also
why students that go to fraternity or open bar
parties tend to drink too much. Consider the
example of a fraternity party in college The hhh
Social Marginal Cost PMC external cost

• We solve this problem by
• Taxes
• Quotas
• Private Solution (assign rights)

P
SPMC
Popt
Pm
DMB
Fish caught
Qm
Qopt
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Q What kind of good is the beer ONCE the beer is
already at the party? A When the beer is at the
party, beer is a common good. It is
non-excludable and rival. It is non-excludable
because once the beer is at the party everyone
inside the party is allowed to drink beer.
Fraternities can not exclude people from drinking
beer. It is rival because every beer drank by one
guest can not be consumed by another guest. As
we studied before common goods suffer from over
consumption. The cost for each party attendant of
an extra beer is zero. In other words, the
marginal cost of a beer is zero. Each party
attendant will consumer beer until the marginal
benefit of an extra beer is equal to the marginal
cost. In this particular case, MB of beer MC
of beer MB of beer 0
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These are the marginal cost and benefit for the
party attendant
The marginal benefit decreases with the amount of
beer drank. Remember the first beer gives you a
lot of happiness and each subsequent beer gives
you less and less happiness.
P
MB
MC
MC0
Q
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NATURAL MONOPOLIES
These goods are excludable and non-rival. The
non-rivalry nature of the good means that the
private marginal cost is zero. For efficiency
consideration we will want PMCPMB, however at
that point the price is zero and the quantity is
Qopt. No private supplier will be willing to be
in this market if the price is zero. Hence, the
supplier charges a positive price 0.99 to
download songs.
P
There is nothing we can do to solve this problem.
For efficiency we want P0 and QQopt but if that
will produce no quantity in the market in
long-run. We let the producer charge 0.99.
Itunes Songs
0.99
DPMB
SPMC0
Songs downloaded
Q
Qopt