Public Goods

1
Public Goods

• Topic Nine
• Chapter Ten, Eleven, Twelve

2
Normal Goods
Marginal Cost
Average Cost
Pm
Qm
3
Pure Public Goods
Average Cost
Marginal Cost
Qm
4
Pure Public Goods

• The marginal cost of producing the second unit of
  output is zero
• Other characteristics
• Consumption rivalry
• Non-excludability
• Supply-side externality
• Cannot assign property rights
• Cannot defend property rights
• National defense

5
Non-excludability

• Free rider problem
• High cost of determining relative preferences
• Perfect knowledge of preferences
• Leads to inefficient output

6
Quasi-Public Goods
Average Cost
Marginal Cost
Qm
7
Quasi-Public Goods

• The marginal cost of producing the second unit is
  positive, but not high
• Other characteristics
• Consumption rivalry
• Excludability
• Can assign property rights
• Can defend property rights
• Satellite network

8
Privately Produced Goods - supply side
Marginal Cost
Average Cost
Pm
Qm
9
Privately Produced Goods

• Fixed costs of capital are averaged into the
  production process
• Capital is discrete
• Labor is continuous
• Double or triple shifts on same piece of capital
• Increasing returns to fixed capital
• Decreasing marginal cost curve
• The cost of each additional unit of output
  decreases
• Capacity constraint
• At some point decreasing returns to fixed capital
• Increasing marginal cost curve
• The cost of each additional unit of output
  increases

10
Pure Public Goods - supply side
Average Cost
Qm
Marginal Cost
11
Pure Public Goods

• The marginal cost of producing the first unit is
  equal to the total cost
• The marginal cost of producing the second and
  subsequent units of output is zero
• No decreasing or increasing returns to scale
• There is no economic determination of optimal
  output

12
Characteristics of Pure Public Goods

• Non-rival consumption
• utility of consumption unaffected by others
  consumption
• Non-excludability
• Cost of excluding others consumption is infinite
• Leads to inefficient or no market output
• Very few goods qualify as pure public goods

13
Property Rights (a function of excludability)

• Cannot assign property rights
• All of none have property rights to pure public
  goods
• Can defend property rights collectively, but not
  individually
• Pure public goods can be produced privately or
  publicly

14
Free-rider problem (Policing)?

• Imperfect knowledge of preferences
• Preferences can only be inferred
• High levels wealth may have different preferences
  with respect to crime\
• Revealed preferences through political choices
• High wealth more conservative, preserve what they
  have
• Low levels of wealth prefer police emphasis on
  injury
• High cost of determining relative preferences?
• Local taxes based on wealth (property taxes)
• Match wealth and protection (police, fire, etc.)
• Not a free-rider problem

15
Free-rider Problem National Defense

• Canada depends on the U.S. defense?
• During the cold war
• Did Canada pay its fair share
• Europe depends on the U.S. defense
• War on Terrorism
• Does Europe pay its fair share
• Is the U.S. defense machine a public good?

16
Quality of Life a Public Good?

• Some measures of Quality of Life
• Educational opportunities
• Environmental attitudes
• Amount and seriousness of crime
• Relative freedom
• Does everyone get the same level of Quality of
  Life
• Immigration is a measure of its public goodness

17
Radio TV as Public Goods?

• Radio waves are a public good (Quasi??)
• Non-rival
• Certainly this is true
• Non-excludable
• Radio waves can be jammed
• Publicly or Privately provided
• Public funded by government
• Private funded by access to airwaves in the form
  of commercials
• Radio band is controlled by the government

18
Radio TV as Private Goods?

• Satellite and cable broadcasts
• Non-rival
• But not non-exclusive
• Consumers can and are excluded
• Technology changed things
• The public-good quality of the airwaves no longer
  are

19
Quasi-Public Goods supply side
Average Cost
Marginal Cost
Qm
20
Quasi-Public Goods

• The marginal cost of producing the second and
  subsequent units is positive, but not high
• This may apply to Radio TV
• Other characteristics
• Non-rival consumption
• This assumption may be relaxed
• High numbers of consumers may reduce its
  consumption
• Public parks
• Non-excludability from consumption
• For example concerts
• Can assign defend property rights

21
Vinyl Records Movies as a Private Goods

• Consumption is non-rival
• Exclusion
• Must buy the record
• Property rights assignable by buying record
• Property rights defensible
• Must buy a ticket to the theater
• Property rights assignable by ticket
• Property rights defensible

22
CDs and DVDs as Public Goods

• Consumption is non-rival
• Exclusion
• Theaters still can exclude easily
• High cost to defense against pirating
• Internet access to CDs and DVDs is relatively easy

23
Internet

• Private good?
• Non-rival
• High traffic on internet affects consumption
• Non-exclusionary
• Must have a gateway, relative high access cost
• Public good?
• Once one has access much of the internet is free
• Other parts have costs associated

24
Public Good or Private Good

• Police
• Protection?
• Private security firms
• Investigation?
• Private eyes
• Fire
• Parks

25
Government a Public Good

• Supplies the infrastructure for the maintenance
  and defense of private goods
• Federal
• National defense, education, courts,
  constitutional protections
• Goods and services demanded by their constituency
• Healthcare, roads, bridges, national parks
• Provincial
• Education, courts
• Goods and services demand by their constituency
• Healthcare, roads, bridges, provincial parks
• Local
• Education, road clearing and maintenance

26
Governments Change

• Governments continually change property rights
• Creating new rights obligations
• Laws
• Regulations
• Statutes
• Zoning
• Taxes
• Treaties
• International negotiations
• Etc.