L24

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L24

• Public Goods

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Public Goods -- Definition

• Some goods are
• Nonexcludable (NE) property rights cannot be
  enforced.
• Nonrival (NR) each consumer can simultaneously
  consume the good.
• A good is public if it is NE and NR

E NE
R
NR
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Examples of public goods

• National defense
• Mathematical formula (Research)
• Broadcast radio and TV programs
• National parks

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Park Size Market Outcome

• Two agents A and B
• Pubic good Park
• A Regular consumer
• B Park lover

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Plan for today

• 1. Free Markets (Nash Equilibrium)
• 2. Socially optimal outcome
• 3. Implementation

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A best response to
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A best response to
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B best response
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Equilibrium

• Nash Equilibrium
• best response to
• best response to

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Free riding by A

• In Nash Equilibrium
• B Creates a park of size 4
• A Does not contribute at all and uses the park
  created by B
• Free riding by A
• Size of the park (General rule)

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Free Market Supply
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Pareto efficient outcome

• Mayor maximizes welfare of both A and B

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Underprovision of public

• Efficient size of Park 6
• Underprovision of public good
• Public good positive externality
• (Pareto) optimal size (General Rule)

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Socially optimal supply
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Implementation of efficient outcome

• How to implement efficient outcome?
• Tax agents and provide Public Good
• Problem Information about valuation
• Mechanism design How to extract information in
  the least costly way