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CHAPTER 5 Public Goods PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Public Goods Many definitions in use Focus on characteristics that might cause resources to be misallocated Not just public provision One of two characteristics: Collective Consumption Nonexcludability PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-2 Collective Consumption Goods Consumption by one consumer will not reduce the consumption of any other consumer MC = 0 Example: radio broadcast signal PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-3 The Argument for Public Sector Production At efficient output level P=MC MC = 0 for collective consumption good For efficiency, P = 0 Private sector will not produce efficient level of output Solution: Government production at zero price PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-4 The Argument for Private Sector Production Lack of congestion might be because of past overproduction Private production provides a revealed price mechanism Public production is financed through taxation Benefits of production vs. excess burden PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-5 Congestion of Collective Consumption Goods Collective consumption goods can become congested Collective consumption is an economic concept, not technological Cannot evaluate based on good’s characteristics Example: swimming pool PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-6 The Optimal Output of a Collective Consumption Good Private consumption goods Market demand determined by horizontally summing individual demand curves Collective consumption goods Market demand determined by vertically summing individual demand curves PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-7 The Optimal Output of a Collective Consumption Good PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-8 Lindahl Pricing Set so each individual pays a marginal price equal to the marginal benefit that individual receives Not necessary for the efficient level of output Individuals cannot adjust individual quantity consumed Price does not have to equal consumer’s marginal valuation to be efficient PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-9 Lindahl Pricing Advantage: everyone prefers same level of output Increases likelihood that efficient level of output is chosen Practicality? Earmarked gasoline taxes Financing public education through property taxation PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-10 Pure and Impure Collective Consumption Goods If each consumer’s consumption share is a function of total output, optimality condition holds regardless whether public or private good Anytime consumer cannot quantity adjusted, optimality condition holds Example: public education PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-11 Nonexcludability Once produced, it is difficult to keep people from consuming the good Unrelated to collective consumption Does not have to be publicly provided Example: National defense PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-12 Nonexcludability as a Prisoner’s Dilemma Free riding Incentive to benefit from the good without contributing to production Self-interest = everyone free rides Inability to cooperate leads to prisoner’s dilemma PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-13 Nonexcludability as a Prisoner’s Dilemma PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-14 Nonexcludability and Collective Consumption in Public Goods Public goods embody two characteristics Only one is needed to be a public good Some have elements of both Pure private good Excludable, private in consumption Pure public good Nonexcludable, collective consumption PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-15 Nonexcludability and Collective Consumption in Public Goods Pure private good Excludable, private in consumption Pure public good Nonexcludable, collective consumption PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-16 Nonexcludability and Collective Consumption in Public Goods PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-17 Public Policy Towards Public Goods Public goods do not have to be produced publicly Examples: Microcomputer software Television Radio PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 5-18
