Ch35 Public Goods

Chapter Thirty-Five
Public Goods
Public Goods -- Definition
A good is purely public if it is both
nonexcludable and nonrival in
consumption.
Nonexcludable -- all consumers
can consume the good.
Nonrival -- each consumer can
consume all of the good.
Public Goods -- Examples
Broadcast radio and TV programs.
National defense.
Public highways.
Reductions in air pollution.
National parks.
Reservation Prices
A consumers reservation price for a
unit of a good is his maximum
willingness-to-pay for it.
Consumers wealth is
Utility of not having the good is
U w ( , ). 0
w.
Reservation Prices
Consumers wealth is
Utility of paying p for the good is
U w ( , ). 0
w.
U w p ( , ). 1
Reservation Prices
Consumers wealth is
Utility of paying p for the good is

Reservation price r is defined by
U w ( , ). 0
w.
U w p ( , ). 1
U w U w r ( , ) ( , ). 0 1 =
Reservation Prices; An Example
Consumers utility is U x x x x ( , ) ( ).
1 2 1 2
1 = +
Utility of not buying a unit of good 2 is
V w
w
p
w
p
( , ) ( ) . 0 0 1
1 1
= + =
Utility of buying one unit of good 2 at
price p is
V w p
w p
p
w p
p
( , ) ( )
( )
. =

+ =

1 1 1
2
1 1
Reservation Prices; An Example
Reservation price r is defined by
V w V w r ( , ) ( , ) 0 1 =
I.e. by
w
p
w r
p
r
w
1 1
2
2
=

=
( )
.
When Should a Public Good Be
Provided?
One unit of the good costs c.
Two consumers, A and B.
Individual payments for providing the
public good are g
A
and g
B
.
g
A
+ g
B
> c if the good is to be
provided.
Provided?
Payments must be individually
rational; i.e.

and
U w U w g
A A A A A
( , ) ( , ) 0 1 s
U w U w g
B B B B B
( , ) ( , ). 0 1 s
Provided?
Payments must be individually
rational; i.e.

and

Therefore, necessarily
and
U w U w g
A A A A A
( , ) ( , ) 0 1 s
U w U w g
B B B B B
( , ) ( , ). 0 1 s
g r
A A
s g r
B B
s .
Provided?
And if
and

then it is Pareto-improving to supply
the unit of good
U w U w g
A A A A A
( , ) ( , ) 0 1 <
U w U w g
B B B B B
( , ) ( , ) 0 1 <
Provided?
And if
and

then it is Pareto-improving to supply
the unit of good, so
is sufficient for it to be efficient to
supply the good.
U w U w g
A A A A A
( , ) ( , ) 0 1 <
U w U w g
B B B B B
( , ) ( , ) 0 1 <
r r c
A B
+ >
Private Provision of a Public
Good?
Suppose and .
Then A would supply the good even
if B made no contribution.
B then enjoys the good for free; free-
riding.
r c
A
> r c
B
<
Good?
Suppose and .
Then neither A nor B will supply the
good alone.
r c
A
< r c
B
<
Good?
Suppose and .
good alone.
Yet, if also, then it is Pareto-
improving for the good to be supplied.
r c
A
< r c
B
<
r r c
A B
+ >
Good?
Suppose and .
good alone.
Yet, if also, then it is Pareto-
improving for the good to be supplied.
A and B may try to free-ride on each
other, causing no good to be supplied.
r c
A
< r c
B
<
r r c
A B
+ >
Free-Riding
Suppose A and B each have just two
actions -- individually supply a public
good, or not.
Cost of supply c = $100.
Payoff to A from the good = $80.
Payoff to B from the good = $65.
Free-Riding
Suppose A and B each have just two
actions -- individually supply a public
good, or not.
Cost of supply c = $100.
Payoff to A from the good = $80.
Payoff to B from the good = $65.
$80 + $65 > $100, so supplying the
good is Pareto-improving.
Free-Riding
-$20, -$35 -$20, $65
$100, -$35 $0, $0
Buy
Dont
Buy
Buy
Dont
Buy
Player A
Player B
Free-Riding
-$20, -$35 -$20, $65
$100, -$35
$0, $0
Buy
Dont
Buy
Buy
Dont
Buy
Player A
Player B
(Dont Buy, Dont Buy) is the unique NE.
Free-Riding
-$20, -$35 -$20, $65
$100, -$35 $0, $0
Buy
Dont
Buy
Buy
Dont
Buy
Player A
Player B
But (Dont Buy, Dont Buy) is inefficient.
Free-Riding
Now allow A and B to make
contributions to supplying the good.
E.g. A contributes $60 and B
contributes $40.
Payoff to A from the good = $40 > $0.
Payoff to B from the good = $25 > $0.
Free-Riding
$20, $25 -$60, $0
$0, -$40 $0, $0
Contribute
Dont
Contribute
Contribute
Dont
Contribute
Player A
Player B
Free-Riding
$20, $25 -$60, $0
$0, -$40 $0, $0
Contribute
Dont
Contribute
Contribute
Dont
Contribute
Player A
Player B
Two NE: (Contribute, Contribute) and
(Dont Contribute, Dont Contribute).
Free-Riding
So allowing contributions makes
possible supply of a public good
when no individual will supply the
good alone.
But what contribution scheme is
best?
And free-riding can persist even with
contributions.
Variable Public Good Quantities
E.g. how many broadcast TV
programs, or how much land to
include into a national park.
E.g. how many broadcast TV
programs, or how much land to
include into a national park.
c(G) is the production cost of G units
of public good.
Two individuals, A and B.
Private consumptions are x
A
, x
B
.
Budget allocations must satisfy
x x c G w w
A B A B
+ + = + ( ) .
Budget allocations must satisfy

MRS
A
& MRS
B
are A & Bs marg.
rates of substitution between the
private and public goods.
Pareto efficiency condition for public
good supply is

x x c G w w
A B A B
+ + = + ( ) .
MRS MRS MC
A B
+ = ( ). G
good supply is

Why?

MRS MRS MC
A B
+ = ( ). G
good supply is

Why?
The public good is nonrival in
consumption, so 1 extra unit of
public good is fully consumed by
both A and B.

MRS MRS MC
A B
+ = ( ). G
Suppose
MRS
A
is As utility-preserving
compensation in private good units
for a one-unit reduction in public
good.
Similarly for B.
MRS MRS MC
A B
+ < ( ). G
is the total payment to
A & B of private good that preserves
both utilities if G is lowered by 1 unit.
MRS MRS
A B
+
is the total payment to
both utilities if G is lowered by 1 unit.
Since , making
1 less public good unit releases more
private good than the compensation
payment requires Pareto-
improvement from reduced G.
MRS MRS MC
A B
+ < ( ) G
MRS MRS
A B
+
Now suppose MRS MRS MC
A B
+ > ( ). G
Now suppose
is the total payment by
both utilities if G is raised by 1 unit.
MRS MRS MC
A B
+ > ( ). G
MRS MRS
A B
+
Now suppose
is the total payment by
both utilities if G is raised by 1 unit.
This payment provides more than 1
more public good unit Pareto-
improvement from increased G.
MRS MRS MC
A B
+ > ( ). G
MRS MRS
A B
+
Hence, necessarily, efficient public
good production requires
MRS MRS MC
A B
+ = ( ). G
Hence, necessarily, efficient public
good production requires

Suppose there are n consumers; i =
1,,n. Then efficient public good
production requires
MRS MRS MC
A B
+ = ( ). G
MRS MC
i
i
n
G
=
=
1
( ).
Efficient Public Good Supply --
the Quasilinear Preferences Case

U x G x f G i
i i i i
( , ) ( ); , . = + = A B

Utility-maximization requires
U x G x f G i
i i i i
( , ) ( ); , . = + = A B
MRS f G i
i i
= ' = ( ); , . A B
MRS
p
p
f G p i
i
G
x
i G
= ' = = ( ) ; , . A B

Utility-maximization requires

is is public good
demand/marg. utility curve; i = A,B.
U x G x f G i
i i i i
( , ) ( ); , . = + = A B
MRS f G i
i i
= ' = ( ); , . A B
MRS
p
p
f G p i
i
G
x
i G
= ' = = ( ) ; , . A B
p f G
G i
= '( )
MU
A

MU
B

p
G

G
MU
A

MU
B

MU
A
+MU
B

p
G

G
p
G

MU
A

MU
B

MU
A
+MU
B

MC(G)
G
G
p
G

MU
A

MU
B

MU
A
+MU
B

MC(G)
G*
G
p
G

MU
A

MU
B

MU
A
+MU
B

MC(G)
G*
p
G
*
G
p
G

MU
A

MU
B

MU
A
+MU
B

MC(G)
G*
p
G
*
p MU G MU G
G
*
( *) ( *) = +
A B
G
p
G

MU
A

MU
B

MU
A
+MU
B

MC(G)
G*
p
G
*
p MU G MU G
G
*
( *) ( *) = +
A B
Efficient public good supply requires A & B
to state truthfully their marginal valuations.
Free-Riding Revisited
When is free-riding individually
rational?
rational?
Individuals can contribute only
positively to public good supply;
nobody can lower the supply level.
rational?
Individuals can contribute only
positively to public good supply;
nobody can lower the supply level.
Individual utility-maximization may
require a lower public good level.
Free-riding is rational in such cases.
Given A contributes g
A
units of
public good, Bs problem is

subject to
max
, x g
B B
U x g g
B B A B
( , ) +
x g w g
B B B B
+ = > , . 0
G
x
B

g
A

Bs budget constraint; slope = -1
G
x
B

g
A

g
B
> 0
g
B
< 0
is not allowed
G
x
B

g
A

g
B
> 0
g
B
< 0
is not allowed
G
x
B

g
A

g
B
> 0
g
B
< 0
is not allowed
G
x
B

g
A

g
B
> 0
g
B
< 0
is not allowed
g
B
= 0 (i.e. free-riding) is best for B
Demand Revelation
A scheme that makes it rational for
individuals to reveal truthfully their
private valuations of a public good is
a revelation mechanism.
E.g. the Groves-Clarke taxation
scheme.
How does it work?
Demand Revelation
N individuals; i = 1,,N.
All have quasi-linear preferences.
v
i
is individual is true (private)
valuation of the public good.
Individual i must provide c
i
private
good units if the public good is
supplied.

Demand Revelation
n
i
= v
i
- c
i
is net value, for i = 1,,N.
Pareto-improving to supply the
public good if

v c
i i
i
N
i
N
>
=
1 1
Demand Revelation
n
i
= v
i
- c
i
is net value, for i = 1,,N.
Pareto-improving to supply the
public good if

v c n
i i i
i
N
i
N
i
N
> >
=
=
0
1 1 1
.
Demand Revelation
If and

or and

then individual j is pivotal; i.e.
changes the supply decision.
n
i
i j
N
<
=
0 n n
i j
i j
N
+ >
=
0
n
i
i j
N
>
=
0 n n
i j
i j
N
+ <
=
0
Demand Revelation
What loss does a pivotal individual j
inflict on others?
Demand Revelation
inflict on others?

If then is the loss.
n
i
i j
N
<
=
0, >
=
n
i
i j
N
0
Demand Revelation
inflict on others?


n
i
i j
N
<
=
0, >
=
n
i
i j
N
0
n
i
i j
N
>
=
0, n
i
i j
N
>
=
0
Demand Revelation
For efficiency, a pivotal agent must
face the full cost or benefit of her
action.
The GC tax scheme makes pivotal
agents face the full stated costs or
benefits of their actions in a way that
makes these statements truthful.
Demand Revelation
The GC tax scheme:
Assign a cost c
i
to each individual.
Each agent states a public good net
valuation, s
i
.
Public good is supplied if
otherwise not.
s
i
i
N
>
=
0
1
;
Demand Revelation
A pivotal person j who changes the
outcome from supply to not supply

pays a tax of
s
i
i j
N
.
=
Demand Revelation
outcome from supply to not supply

pays a tax of

outcome from not supply to supply

pays a tax of
s
i
i j
N
.
=
=
s
i
i j
N
.
Demand Revelation
Note: Taxes are not paid to other
individuals, but to some other agent
outside the market.
Demand Revelation
Why is the GC tax scheme a
revelation mechanism?
Demand Revelation
An example: 3 persons; A, B and C.
Valuations of the public good are:
$40 for A, $50 for B, $110 for C.
Cost of supplying the good is $180.
Demand Revelation
An example: 3 persons; A, B and C.
Valuations of the public good are:
$40 for A, $50 for B, $110 for C.
Cost of supplying the good is $180.
$180 < $40 + $50 + $110 so it is
efficient to supply the good.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
B & Cs net valuations sum to
$(50 - 60) + $(110 - 60) = $40 > 0.
A, B & Cs net valuations sum to
$(40 - 60) + $40 = $20 > 0.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
B & Cs net valuations sum to
$(50 - 60) + $(110 - 60) = $40 > 0.
$(40 - 60) + $40 = $20 > 0.
So A is not pivotal.
Demand Revelation
If B and C are truthful, then what net
valuation s
A
should A state?
Demand Revelation
valuation s
A
should A state?
If s
A
> -$20, then A makes supply of
the public good, and a loss of $20 to
him, more likely.
Demand Revelation
valuation s
A
should A state?
If s
A
> -$20, then A makes supply of
him, more likely.
A prevents supply by becoming
pivotal, requiring
s
A
+ $(50 - 60) + $(110 - 60) < 0;
I.e. A must state s
A
< -$40.
Demand Revelation
Then A suffers a GC tax of
-$10 + $50 = $40,
As net payoff is
- $20 - $40 = -$60 < -$20.
Demand Revelation
Then A suffers a GC tax of
-$10 + $50 = $40,
As net payoff is
- $20 - $40 = -$60 < -$20.
A can do no better than state the
truth; s
A
= -$20.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
A & Cs net valuations sum to
$(40 - 60) + $(110 - 60) = $30 > 0.
$(50 - 60) + $30 = $20 > 0.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
A & Cs net valuations sum to
$(40 - 60) + $(110 - 60) = $30 > 0.
$(50 - 60) + $30 = $20 > 0.
So B is not pivotal.
Demand Revelation
What net valuation s
B
should B state?
Demand Revelation
B
should B state?
If s
B
> -$10, then B makes supply of
him, more likely.
Demand Revelation
B
should B state?
If s
B
> -$10, then B makes supply of
him, more likely.
B prevents supply by becoming
pivotal, requiring
s
B
+ $(40 - 60) + $(110 - 60) < 0;
I.e. B must state s
B
< -$30.
Demand Revelation
Then B suffers a GC tax of
-$20 + $50 = $30,
Bs net payoff is
- $10 - $30 = -$40 < -$10.
B can do no better than state the
truth; s
B
= -$10.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
A & Bs net valuations sum to
$(40 - 60) + $(50 - 60) = -$30 < 0.
$(110 - 60) - $30 = $20 > 0.
Demand Revelation
Assign c
1
= $60, c
2
= $60, c
3
= $60.
A & Bs net valuations sum to
$(40 - 60) + $(50 - 60) = -$30 < 0.
$(110 - 60) - $30 = $20 > 0.
So C is pivotal.
Demand Revelation
C
should C state?
Demand Revelation
C
should C state?
s
C
> $50 changes nothing. C stays
pivotal and must pay a GC tax of
-$(40 - 60) - $(50 - 60) = $30, for a net
payoff of $(110 - 60) - $30 = $20 > $0.
Demand Revelation
C
should C state?
s
C
-$(40 - 60) - $(50 - 60) = $30, for a net
payoff of $(110 - 60) - $30 = $20 > $0.
s
C
< $50 makes it less likely that the
public good will be supplied, in which
case C loses $110 - $60 = $50.
Demand Revelation
C
should C state?
s
C
-$(40 - 60) - $(50 - 60) = $30, for a net
payoff of $(110 - 60) - $30 = $20 > $0.
s
C
< $50 makes it less likely that the
public good will be supplied, in which
case C loses $110 - $60 = $50.
C can do no better than state the
truth; s
C
= $50.
Demand Revelation
GC tax scheme implements efficient
supply of the public good.
Demand Revelation
GC tax scheme implements efficient
supply of the public good.
But, causes an inefficiency due to
taxes removing private good from
pivotal individuals.

Ch35 Public Goods

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Ch35 Public Goods

Hochgeladen von

Copyright:

Verfügbare Formate

Chapter Thirty-Five

Das könnte Ihnen auch gefallen