PUBLIC GOODS & PUBLIC CHOICE

Eric J. Heikkila
 Public Goods???

• Publicness
– Goods that are provided by the public sector
– Goods that are nonrival in consumption

• Pure rivalry: the amount of the good consumed by one

person diminishes the stock available for others by
precisely the same quantity
 Public cs Private, Goods vs Providers
3 2

4
1.Food
2.National Def
3.Radio & Tv
4.Land Use
Zoning
private public 5.Highway trans
6.Air trans
sector sector
8
9
5 7.Housing
6
8.Open Space
9.Fire & police

rival
7
1
 Optimal Provision : Rival goods
Optimal condition
Max Net Benefit=
MC MB = MC

MB = mb1
Pr* = mb2
= Pr*
= MC

mb2

mb1

q1r* q2r* Qr *= q1r* + q2r*

 Optimal Provision : Nonrival goods
Optimal condition
Max Net Benefit=
MC MB = MC

MB = mb1+mb2
Pn* Pn *= mb1 +mb2* = MC

P2n*
P2n *= mb2*

mb2
P1n* P1n *= mb1*

mb1
Q1 Q2 Qn *= q1n* + q2n*
 The Tiebout mechanism
with communities of equal size
MC

MC1 = n*mb1 = MB1

MCi = n*Pi
mb2
= n*mbi
mb1 mb3 mb4 = MBi

MC/n
P4
P3
P2
P1 P1n *= mb1*

q1 q2 q3 q4
 The Tiebout mechanism
with communities of unequal size
MC

mb2
mb1 mb3

C /n
2
M
2= C/ n
3
mc = M
mc3
M2 M3 C/n1
= M
mc1

M1

Quantity
 SEP Goods
Exp 1: All households attend public schools, taxes @ 10%

Category # of Average Tax Base # of Public Tax @ 10 %

Households Income Schoolers
Wealthy 20 $ 80,000 $ 1.6 million 20 $ 160,000

Poor 80 $ 20,000 $ 1.6 million 80 $ 160,000

Total/Average 100 $ 32.000 $ 3.2 million 100 $ 320,000

Revenue Per Public School Pupil: $ 3,200

 SEP Goods
Exp 2: Only poor households attend public schools, taxes @ 5%

Category # of Average Tax Base # of Public Tax @ 10 %

Households Income Schoolers
Wealthy 20 $ 80,000 $ 1.6 million 0 $ 80,000

Poor 80 $ 20,000 $ 1.6 million 80 $ 80,000

Total/Average 100 $ 32.000 $ 3.2 million 80 $ 160,000

Revenue Per Public School Pupil: $ 2,000

 SEP Goods
Exp 3: Only wealthy households attend public schools, fees @ 5%

Category # of Average Tax Base # of Public Tax @ 10 %

Households Income Schoolers
Wealthy 20 $ 80,000 $ 1.6 million 20 $ 80,000

Poor 80 $ 20,000 $0 0 $0

Total/Average 100 $ 32.000 $ 1.6 million 20 $ 80,000

Revenue Per Public School Pupil: $ 4,000

 The Privatization Debate
• Privatization
– Process whereby the responsibility for delivering
services hitherto provided by the public sector is
translated to the private sector
– Argument: efficiency
– MB = P and MC = P (MB = MC)
• On balance:
– Market failure: fail to maximize net social benefit or
fail to hold MSB = MSC
– Market optimal : MSB = MB = P and
MSC = MC = P
 The Privatization Debate
• Externalities:
– Marginal costs or benefits that are not
reflected in market prices (MC ≠ MSC or
MB ≠ MSB)
– Ex: pollution (P = MB = MSB but P = MC≠
MSC) so that (MC ≠ MSC and MSB ≠ MSC)
– Ex: merit good (P = MC = MSC but P = MB≠
MSB)
• Market failure:
– Public intervention
• Quantity oriented
• Price oriented