Unit 6Chapter 18

Public Goods

I. Characteristics of Goods

a) Excludable: Supplier can prevent people who do not pay for it from consuming it.

b) Rival in Consumption: Same unit of a good cannot be consumed by more than one person at a time.

• IF A GOOD MEETS BOTH OF THESE CHARACTERISTICS IT IS A PRIVATE GOOD

I. Characteristics of Goods

c) Nonexcludable: supplier of product cannot prevent consumption by people who do not pay for it.

d) Nonrival in Consumption: more than one person can consume the same unit of the good at the same time.

• GOOD THAT MEET THESE TWO CHARACTERISTICS ARE CALLED PUBLIC GOODS.

II. Summary of different types of goodsThere are four types of goods:

Private goods, which are excludable and rival in consumption, like wheatPublic goods, which are nonexcludable and nonrival in consumption, like a public sewer systemCommon resources, which are nonexcludable but rival in consumption, like clean water in a riverArtificially scarce goods, which are excludable but nonrival in consumption, like pay-per-view movies on cable TV

Non-excludable

Excludable

Rival in consumption Nonrival in consumption

Private goods

• Wheat

• Bathroom fixtures

Artificially scarce goods

• Pay-per-view movies

• Computer software

Public goods

• Public sanitation

• National defense

Common resources

• Clean water

• Biodiversity

If there was no government, how would schools, parks, and

freeways be different? Would there be enough to meet

our needs?

Public Goods

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The Free Rider Problem: People that benefit from

something without paying for it.

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Examples: 1. People who download music illegally2. People who watch a street performer and

don’t pay 3. Teenagers that live at home and don’t

have a job

What’s wrong with this picture?

8

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•Canadian Military Spending: $21.8 Billion

•US Military Spending: $660 Billion

Why doesn’t Canada

spend more on their military?

Does anyone free ride off you?

The Final Exam•I am willing to give a 100% on the final exam to whichever class gives me $1000.•Everyone in the class will get 100% even if they don’t pay.•Who is willing to pay?•What about those that refuse to pay?

Solution?EVERYONE pays a mandatory taxand all receive the same benefits.

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Identify which of the following are

TRUE public goods(have non-exclusion and non-

rival consumption):

1. Hamburgers2. Satellite TV 3. Free Public Education4. Homes5. Street lights

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How do we decide how many public goods we need?

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How does the government determine what quantity of public goods to produce?

They use Supply and Demand Demand for Public Goods-

The Marginal Social Benefit of the good determined by citizens willingness to pay.

Supply of Public Goods- The Marginal Social Cost of providing each additional quantity.

Demand for a New ParkMarginal willingness to pay higher

taxes# of

ParksAdam is willing to

pay

Jill is willing to

pay

Society’s Demand for Parks

Marginal Cost

1 $4 $5 $9 $52 $3 $4 $7 $53 $2 $3 $5 $54 $1 $2 $3 $55 $0 $1 $1 $5

Assume:1. There are only

two people in society.

2. Each additional park costs $5

How many parks should be made?

# of Parks

Adam is willing to

pay

Jill is willing to

pay

Society’s Demand (MSB)

Marginal Cost per

Park

1 $4 $5 $9 $52 $3 $4 $7 $53 $2 $3 $5 $54 $1 $2 $3 $55 $0 $1 $1 $5

Demand for a New ParkMarginal willingness to pay higher

taxes

# of Parks

Adam is willing to

pay

Jill is willing to

pay

Society’s Demand (MSB)

Marginal Social Cost

1 $4 $5 $9 $52 $3 $4 $7 $53 $2 $3 $5 $54 $1 $2 $3 $55 $0 $1 $1 $5

Demand for a New ParkMarginal willingness to pay higher

taxes

Price

Quantity of Parks

$ 9 7

5

3

1

0 1 2 3 4 5

D=MSB

Supply and Demand for Public Parks

The Demand is the equal

to the marginal benefit to

society

$ 9 7

5

3

1

0 1 2 3 4 5

The supply is the public

good’s marginal cost

to society

S=MSC

D=MSB

Supply and Demand for Public ParksPrice

Quantity of Parks

MSB = MSC

1. What if the government made 1 park?

2. What if the government made 4 parks?