Public Goods

DR. RAMA PAL, H&SS

Properties of Public Goods
1. If it has been provided to one consumer it is difficult/impossible to stop
another from enjoying it too.

“Non-Excludable”
Excludable”

2. The amount of the good I enjoy has no affect on the amount you enjoy.

“Non--rival”

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Examples
NON-RIVAL
RIVAL RIVAL

NON- Pure Public Good Commons

EXCLUDABLE Grazing Land, Fishing

EXCLUDABLE Club Good Pure Private Good

Cable TV, Park

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CONSEQUENCES
Non-excludable:
Very difficult for the private sector to provide it and make a profit.

Non-rivalry:
Do not want to exclude people as it is inefficient

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Pareto Inefficiency with Public Goods
p, PMB, PMC, SMB, SMC

pD + pN SMC = pD + pN

pN SMB = PMBD + PMBN

pD PMBN
PMBD

QS Quantity, Q

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Optimal Provision of Public Goods
Unlike the case of private goods, where aggregate demand is found by
summing the individual demands horizontally, with public goods,
aggregate demand is found by summing vertically.

That is, holding quantity fixed, what is each person’s willingness to pay?
pay

Public goods will not be provided (or underprovided) in a perfectly competitive market
because there is no incentive for private individuals to pay for them; they will free-ride
free

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The Free Rider Problem
The fundamental problem of all public goods is I’d rather someone else
paid for the public goods I consumed.

This is called the free-rider problem.

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Prisoners’ Dilemma in Action
agine it costs Rs. 400 to provide a clean He Doesn’t
eet outside my house.
He Pays Pay

her I or my neighbour can pay for it.

I Pay (-100,-100) (-100,300)
both value clean streets at Rs. 300.

ne of us pays Rs. 400 we are both better I Don’t Pay (300,-100) (0,0)
.

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Solving the Free-Rider
Rider Problem
◦ The government can decide to provide the public good if the total
benefits exceed the costs.

◦ The government can make everyone better off by providing the public
good and paying for it with tax revenue.

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Public Provision
Public provision as solution to free-rider
rider problem

Mechanisms for preference revelation

Clarke tax

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Clarke tax
Individual is made aware about his impact on everyone else.

Two relevant players: individual and ‘everyone else’.

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 Graphical Explanation
P, MC, MB-i
MB

MC

MB’i
MBi MCi

Q
H0 H1 H2

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 Clarke Mechanism
Government is deciding on number of parks in a district

Three beneficiaries – A, B, C.

Four alternatives: n = 0, 1, 2, 3.

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 Total Benefits and Costs
Resident 0 1 2 3

A 0 60 90 155

B 0 80 120 140

C 0 120 200 220

Costs 0 120 240 360

Social Net 0 140 170 155

Benefit

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Net Benefits with Equal Cost
Share
Residents 0 1 2 3

A 0 20 10 35

B 0 40 40 20

C 0 80 120 100

Social net 0 140 170 155

benefit

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 Tax on Person A
Person 0 1 2 3

B 0 40 40 20

C 0 80 120 100

Social net 0 120 160 120

benefit

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 Tax on Person B
Person 0 1 2 3

A 0 20 10 35

C 0 80 120 100

Social net 0 100 130 135

benefit
TAX on B = 5

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Incentive for Truthful Revelation
Residents 0 1 2 3

A 0 20 10 70

B 0 40 40 20

C 0 80 120 100

Social net 0 140 170 190

benefit

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 Incentive for Truthful Revelation
Tax on A = 40

Tax is greater than the benefit (=35) with n=3.

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 Common Resources
Common resources, like public goods, are not excludable. They are
available free of charge to anyone who wishes to use them.
them

Common resources are rival goods because one person’s use of the
common resource reduces other people’s use.

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Tragedy of the Commons
The Tragedy of the Commons is a parable that illustrates why common
resources get used more than is desirable from the standpoint of society
as a whole.

◦ Common resources tend to be used excessively when individuals are

not charged for their usage.

◦ This is similar to a negative externality.

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Some Important Common
Resources
Clean air and water

Congested roads

Fish, whales, and other wildlife

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Importance of Property Rights
The market fails to allocate resources efficiently when property
rights are not well-established
established (i.e. some item of value does not
have an owner with the legal authority to control it).
it

When the absence of property rights causes a market failure, the

government can potentially solve the problem.

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