Download impure public goods

Public Goods,
Goods Public Bads,
Bads
and Impure
mp
Public Goods
Outline
• 1. Public Goods
• 2. Two Types of Market Failure
with
ith Public
P bli Goods
G ds
• 3. Public
ubl c Bads
• 4. Public Goods and Common
Res urces as Undesirable Outputs
Resources
• 5. Mixed Goods ((Impure
mp
Public
Goods)
1. PUBLIC GOODS
Public Goods
• Goods that
h are non-rivall and non-
excludable in consumption
p
• Private markets generally do not
guarantee efficient production.
production
• Undersupplied
pp
and underinvestment
• Free riding a chronic problem
Four Types Of Goods (Reminder)
High
g
High
Rivalry
y
Low
Private Goods
Collective Goods
(Toll Goods)
(Social Goods)
Common Resources
Public Goods
E l d bl
Excludability
Low
Public Goods
• Effi
Efficient
i t production
d ti of
f public
bli goods
d
requires
q
collective action to
overcome the inability of private
firms to benefit from privately
supplying public goods.
• Inefficiencies
I ffi i
i are the
h greatest f
for
global public
g
p
goods,
g
, whose benefits
are spread most widely across
space and time.
time
Public Goods
• Public goods are non
non-rival
rival in consumption.
• The marginal benefit of Q accrues to
everyone.
n
• Marginal
g
Social Benefit: MSBQ   MBi Q
n
Q   qi
i1
i 1
• Thus
hus max of Total
otal Economic
Econom c Value implies
mpl es
n
*
*
MB
Q

MSC
Q
 i 
 
i1
Public Goods
P
• Market demand public goods
• Vertical summation because
of non
non-rivalry
rivalry in consumption
(benefits accrue to everyone,
non-rivalry in consumption).
• Market demand private goods
• Horizontal summation because of
rivalry in consumption
Aggregate
A
t MSBQ   MB Q
i
Demand
i1
n
P
Individual
P
Individual
Market
P
Individual
3
Q   qi
i1
y1
2
y2
Y   yi
i 1
Public Goods
• Market demand private goods
• Horizontal summation because of
rivalry in consumption
• Market demand public goods
• Vertical
V tic l summation
summ ti n because
b c us
of non-rivalry in consumption
P
Aggregate
gg g
Demand
MSC
n
 MB Q   MSCQ 
*
*
i
i1
P
Individual
P
Individual
P
Market
Demand
Individual
3
Q   qi
i1
MSC
y1
y2
Y
Global Public Goods as Stocks
• Most global
l b l public
bl goods
d are stock
k variables
bl
that change according to flows.
• Their impact depends upon a stock of a capital-like
variable that accumulates over time.
• For example, flow of ozone accumulates slowly
to form stock of ozone.
Global Public Goods as Stocks
• Technological
h l
l stock
k externalities
l
with
h
public goods.
p
g
• Stocks accumulate, often very slowly,
• Makes
M k it difficult
diffi lt to
t recognize
i the
th
symptoms
y p
of the external costs until
too late to address.
Global Public Goods as Stocks
• St
Stock
k externalities
t
liti often
ft have
h
longl
lasting consequences and are
i
irreversible
ibl or near-irreversible.
i
ibl
• For example,
p , once the stock of a
species has disappeared, it is gone
foreverr as a viable
for
a
biological
o og ca system.
syst m.
Congestion
g
with Some
Environmental Public Goods
• Some environmentall public
l goods are
only
y non-rival up
p to a point.
p
• At low levels of demand for ecosystem
services non-rivalry.
services,
non rivalry
• As demand g
grows, non-rivalry
y may
y
decline and congestion set in.
• Raises marginal cost of others.
others
Congestion
MPC MSC
MPC,
Congestion starts
here
M
Marginal
i l Social
S i l Cost
C t (MSC)
Marginal Private Cost (MPC)
• Marginal
g
social cost of consumption
p
or
production exceeds marginal private cost
when congestion starts
• MSC-MPC = marginal externality
• Externality grows with increasing
congestion
g
• Extent of congestion depends on level of
demand.
Quantity
2. Two Types of Market
2
Failure with Public Goods
1. Supply
pp y Function Has External
Costs
• D
Divergence between
b
private and
d sociall costs
of provision
– Price generally captures only direct use value from
private good consumption
• The environmental cost or damage is not
taken into account.
– Foregone public benefits
– Indirect use, existence, and option values excluded
1. Supply
pp y Function Has External
Costs
• Agents do not base harvesting
h
decisions
on the marginal
g
social cost (the
(
‘true’
supply curve), but on private marginal
costs.
costs
– Private good portion only, not public portion
• When
h uncorrected,
d they
h will
ll supply
l too
much,, and social marginal
g
cost lies above
marginal benefit.
2. External Benefits and Free
Riding
• Presence of
f externall benefits
f
leads
l
to
free riding
g and private
p
underprovision
p
of public good
2 Private Provision of Public Goods
2.
• E
Example:
l Public
l goods such
h as
wilderness,, biodiversity,
y, and other
environmental amenities will not be
supplied privately at socially optimal
amount
• Free
F
riding:
idi
B
Because the
h provider
id
cannot capture
p
the benefits of so doing
g
– once provided, no one can be excluded
2 Private Provision of Public Goods
2.
• Market
k failure
f l
occurs because the
h
amount of a p
public good
g
is
underprovided, and thus marginal social
benefits exceed marginal social costs.
costs
• In this case, more of the (public) good
should
h ld be
b provided,
id d b
but iit iis
forthcoming
g only
y if society
y subsidizes a
private supplier, or provides it publicly
• Public provision is a collective action
issue.
3. P
Public
bl Bads
B d
Public Bads
• An
A undesirable
d i bl public
bli good.
d
• Reduces consumer utility
y or firm profits
p
• Examples:
– Pollution
Pollution, noise
noise, biodiversity loss
loss, coral reef
loss, loss in mortality of protected species
– Loss suffered by one person from pollution
of air does not reduce loss suffered by
another
• Public goods are undersupplied
• Public
P bli b
bads
ds are oversupplied
s
li d
Public Bads
• Excludability
E l
l
• A bad is excludable if it is feasible and
practical to selectively allow consumers
to avoid consumption of the bad.
bad
Public Bads
• Rivalry
• A bad is rival if one person
person’ss
consumption of a unit of the bad
di i ish s th
diminishes
the amountt off the
th b
bad
d
available for others to consume, i.e.
there is a negative social opportunity
cost to others associated with
consumption.
• A bad is nonrival otherwise.
otherwise
Supply
pp y and Demand Public
Bads
• Viewing a bad as a commodity, it has
h a
negative
g
price.
p
• To be willing to consume (i.e. store) a
bad consumer must pay a negative price
bad,
(i.e. receive a positive price -compensation).
i )
Supply
pp y and Demand for Public Bads
Quantity of Bad Consumed
0
• Demand is downward sloping
• If price (compensation) is low, consumer is not
willing
illi tto ttake
k much
h
Demand
Price of
bad
S
Supply
l
Public Bads
• T
To make
k compatible
tibl with
ith standard
t d d
model of supply and demand, refashion
approach
h
• Instead of a bad,, think in terms of a
bad’s disposal or abatement -- which is
a goo
good
• A consumer of a bad is a consumer of
its disposal or abatement or avoidance
• Instead of whale mortality, whale
mortality
t lit abated
b t d
Supply
pp y and Demand for Public
Bads Avoided or Abated
P i of
Price
f Bad
B d (Whale
(Wh l Mortality)
M t lit ) Avoided
A id d or Ab
Abated
t d
Supply
Demand
Quantity of Bad (Whale Mortality)
Avoided or Abated
4. P
4
Public
bli B
Bads
d and
dC
Common
Resources as Undesirable
Joint
Jo
nt Products
roducts
Joint Production of Private Good and Public Bad
Swordfish
Private
Good
Direct
Use
Value
Longline
Fishing
Indirect
Use Value
Sea
T tl
Turtles
Public
G d/
Good
Bad
Existence
Value
Option
Value
• P
Production
d ti P
Possibility
ibilit F
Frontier
ti B
Between
t
Two Desirable Outputs
• Trade-offs
Output of
Desirable
Output Y1
(Fish Species 1)
between Y1 and Y2
• Producing
g more of one g
good
requires producing less of
other good
Output of Desirable Output Y2
(Fish Species 2)
Production Possibility Frontier w. One
Private Good and One Public Bad Output
• Increased
Desirable
Output of
Private
Good
(Swordfish)
production of good
output requires increased
production of bad output
• Reducing
g bad requires
q
reduced production of good
output
• Generates a cost of reduced
good output
• Called weak disposability
Undesirable Output or Bad (Sea Turtle Mortality)
PPF with Bad-Reducing Technical
Change
• Reducing
Desirable
Output of
Private
Good
(Swordfish)
bad does not
require reduced production
of good output
• Called strong
g disposability
p
y
Undesirable Output or Bad (Sea Turtle Mortality)
Mixed Goods
Also Called Impure Public Goods
Mixed Goods
• Environmental Assets as Mixed Goods
• Environmental assets which provide both
private and public good services
( h
(characteristics)
t isti s) are called
ll d mixed
i d goods.
ds
• Also called impure public goods
• Different than joint product of private
good and public good/bad,
/
which has
two outputs.
outputs
Impure Public Goods
High
g
Rivalryy
Private Goods
High
Excludability
Low
Low
Collective Goods
(Toll Goods)
(Social Goods)
IMPURE PUBLIC
GOODS
Common Resources
Public Goods
• An individuall commodity appears twice
in consumer’s utility
y function,, once on
its own as a private commodity, and once
in combination with the quantities
consumed by others, thereby forming a
public good or bad.
bad
Public good services
enjoyed by consumer h
Private good services
enjoyed by consumer h
• Consumer’s
’ problem is:
• subject to:
Public good services
enjoyed by other
consumers
Maxy h ,zhU h  y h ,zzh  Z h 
py y h  pzzh  I h
• Where:
Income
Private
good
Public good services
enjoyed by consumer h
Impure Public Good with Whaling
Private
Good/Uses
Renewable
Resource
Private
Benefits
IImpure
Public
Good
(Whales)
Direct
Use
Value
Indirect
Use Value
Public Benefits
Public
G d/U
Good/Uses
Existence
Value
Option
Value
Biodiversity as Mixed Goods
• Species provide public good
services in the generation of
ecological services that in turn are
of
f value
l tto h
human society.
i t
• Species provide private good
services of direct economic value in
b hh
both
human consumption and
d
production.
Characteristics of Mixed Goods
• Consumption
ump
of
f mixed
m
good
g
as
private good is unaffected by
consumption of same good as public
g
good
• Because of non-rivalrous
characteristic when public good
Characteristics of Mixed Goods
• Whereas consumption
p
of mixed
good as public good is affected by
consumption of same mixed good as
a private good
•B
Because of
f rivalrous
i l
nature
t
of
f private
i t
goods
Mixed Goods and Market Failure
• Often overexploitation
p
of the
mixed good and underinvestment
and under-supply
under supply in public good
aspect of mixed good
• Pareto-inefficient allocation
• Free riding
• Market only
y values private
p
good
g
uses
Mixed Goods and Market Failure
• Negative Externalities or External Costs
Price of
Private Good
Marginal social
cost = Private +
marginal external cost
Social
Optimum
C
POPTIMUM
PMARKET
D
B
Total
E t
External
l
Cost
A
Supply
pp y
(private
marginal cost)
ABCD = ttotal
t l
external cost
M k t Equilibrium
Market
E ilib i
Demand
QOPTIMUM
QMARKET
Quantity
Marginal Social Costs in More Detail
• M
Marginal
i l social
i l costs
t iinclude:
l d
• ((i)) the loss in situ ((existence,, viewing)
g)
value from wildlife,
• (ii) the opportunity cost from
harvesting the wildlife today rather
than waiting for a more opportune time
in the future when the specimen(s) may
fetch a higher price,
price
Marginal Social Costs in More Detail
• (iii) th
the llostt f
future
t
value
l of
f
offspring
p g that might
g result from
leaving the specimen(s) in place, and
• (iv) the opportunity cost of the
resources employed in the harvest
activity.
i i
High Marginal Social Costs So No
Private Good in Optimum Level of
Impure Public Good
Price
P
i of
f
Private Good
S’ = Social marginal cost
S = Private marginal cost
• Social marginal cost of
harvesting a species is so
high that harvesting is unprofitable.
• No
N private
i t good
d (h
(harvesting)
ti ) iis
appropriate.
• Only pure public good.
Quantity of Private Good
Positive Externalities or External Benefits
Price of Private Good
B
A
POPTIMUM
Social Optimum
Total
External
Benefit
PMARKET
Supply
pp y
C
D
Market Equilibrium
QMARKET
QOPTIMUM
ABCD = T
Total
t l
external benefit
Marginal social
benefit = Private +
marginal external benefit
Private Demand =
Marginal Private Benefit
Quantity of Private Good
Social Welfare with Mixed
Goods
Social Welfare
• Sociall welfare
lf
with
h full
f ll marginall sociall
costs is illustrated in Figure
g
2.
• Failure to include all costs and benefits
leads to suboptimal levels of harvest,
harvest
hS, that are likely well above those
d i db
desired
by global
l b l society,
i
h*.
*
• The loss to global society from
harvesting hs rather than h* is area deg
in Figure 2.
2
Social Welfare
• User cost is marginall sociall cost of
f
using
g a renewable resource
– With insecure property rights, harvesters
ignore this cost and ‘overharvest’
overharvest
• Spillover Effects Example
– External costs = spillover in following
diagram
– Private good is harvests of a wild animal on
a ranch
– Public good is existence value
Social Welfare and
Optimal Level
(= external co
bcef = welfare gain w. nonuse benefi
f in situ wildlife
for
ildlif
abfg = welfare gain w. secure prope
rights
Pareto optimum
w. secure rights
& nonuse benefits
for in situ wildlife
Suboptimal harvest insecure property
& no nonuse benefits for in situ wildli
Social Welfare
• Compare outcomes relative
l
to the
h suboptimal
b
l
level of harvest hs (and even higher harvests
if
f harvest
h
subsidies
b d
are in place).
l
)
• If p
property
p y rights
g
to wildlife (and habitat)
are clearly spelled out and protected by the
courts, then the harvest level would fall to h1.
• In that case, global benefits would increase
by area abfg in
n Figure
F gure 2..
Social Welfare
• If
f in addition it is possible
l to pay
wildlife owners for the nonuse benefits
of in situ wildlife, harvest levels would
decline further to h*, the globally
optimal level of harvest.
• In
I that
h case, global
l b l well-being
ll b i would
ld
increase by
y an additional amount given
g
by area bcef in Figure 2.
• If
f area abfg
bf is larger
l
than
h bcef,
b f then
h the
h
benefits for wildlife protection of specifying
and
d protecting property rights
h is greater
than those from attempting to subsidize
“
“owners”
” of
f wildlife
ldl f for
f protecting in situ
numbers.
• Without appropriate protection of property
rights,
g
transfer payments
p y
to protect
p
in situ
wildlife cannot even be attempted.
Optimal Exploitation of
Mixed Goods
Optimal
p
Exploitation
p
of Mixed
Goods
Marginal
M
i lb
benefit
fit
of private good
Marginal benefit of
public good
Q1: Optimal private exploitation level
where MBprivate = 0
Marginal benefit of private
good exploitation
MB < 0
Q1
Increasing private exploitation Increasing public exploitation
Optimal
p
Exploitation
p
of Mixed
Goods
Marginal
M
i lb
benefit
fit
of private good
Marginal benefit of
public good
Marginal benefit of
public good exploitation
Increasing private exploitation
Increasing public exploitation
Optimal
p
Exploitation
p
of Mixed
Goods
Marginal benefit
of private good
Marginal
M
i lb
benefit
fit of
f
public good
• Over time,, marginal
g
benefit of public
p
good
g
rises with income and education
• Environmental Kuznets curve
Increasing private exploitation
Increasing public exploitation
Optimal
p
Exploitation
p
of Mixed
Goods
Marginal
M
i lb
benefit
fit
of private good
Marginal benefit of
public good
• Q0: Socially optimal exploitation level
where MBprivate = MBpublic
• Optimum is example of equimarginal principle
• Q1: Optimall private exploitation
l
level
l
l
where MBprivate = 0
Q0
Increasing private exploitation
Q1
Increasing public exploitation
Optimal
p
Exploitation
p
of Mixed
Goods
Marginal
M
i lb
benefit
fit
of private good
Marginal benefit of
public good
• Q2: MB Private > MB Public
Insufficient private, excessive public
• Q3: MB Private < MB Public
Insufficient
ff
public,
bl excessive private
• Failure of equimarginal principle
Q2
Increasing private exploitation
Q3
Increasing public exploitation
Optimal
p
Exploitation
p
of Mixed Goods with
Precautionary Approach
Marginal
M
i lb
benefit
fit
of private good
Marginal benefit of
public good
Q0: Socially optimal exploitation level w/out precaution
Q1: Optimal private exploitation level
Q2: Socially optimal exploitation level with precaution
to allow for uncertainty
Precautionary
level
Q2
Q0
Increasing private exploitation
Q1
Increasing public exploitation
Optimal Exploitation of Only Public Good
Optimum exploitation
M
Marginal
i lb
benefit
fit is entire public good
of private good
Marginal benefit of
public or common good
Marginal benefits of public or common
good always exceed (dominates)
marginal
i lb
benefits
fits of
f private
i t good
d
Q0: Socially optimal exploitation level
Q1: Optimal private exploitation level
Q0
Increasing private exploitation
Q1
Increasing public exploitation