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PUBLIC GOOD

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Published in: Economics
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"Public good" generally refers to something that benefits everyone in society, often without excluding anyone. It's a term commonly used in economics, political science, and ethics to describe resources or services that are available to all members of a community. Examples include clean air, public parks, and national defense. These goods are usually funded or provided by the government or through collective efforts to ensure that they are accessible to everyone, regardless of individual contribution.

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  1. PUBLIC GOODS Prof. K. Amirthalingam Department of Economics University of Colombo
  2. Public goods have two features: 1. The consumption of public goods is non-rival v/ Can be jointly consumed by many v/ One individual's consumption will not diminish the amount available for others 2. Public goods are non-excludable. v/ It is impossible to prevent other individuals from consuming that good.
  3. • Some goods may have one of the features. • Ex: Non-rival goods but exclusion is possible: Theatre performances and cricket matches.
  4. Four types of goods Rival in consumption? Yes Excludable? NO Yes Private goods Food and Drinks v/ Car v/ House Common resources Fish in the ocean v/ The environment v/ National parks No Natural monopolies v/ Internet Cable TV Bridge or tunnel Public goods National defense The Law Air traffic control 4
  5. Various things have similarities with public goods -Inspiration can be no rival and no excludable (such as coming from a sunset) -Fear is non rival and non excludable. -Income distribution or honesty are public goods as everyone benefits
  6. Comparison • Private goods • Public goods
  7. • Private goods are distributed through the market mechanism • Goods can be distributed while discriminating among payers and non-payers. • By paying the price the individual reveals his preference. • The producer reaches his decisions based on these preferences • Consumption through paying a price: Private good Private goods creates rivalry.
  8. • Non-rival and non-excludable goods are denoted public goods. • The efficient allocation of resources is based on the principle P = MC. • Perfect competition and Monopoly? • But in the case of public goods since MC = O then P should equal zero too. • As a result only government can produce and allocate public goods
  9. Price of Private Goods c o Private Goods DA s Quantity of Private Goods
  10. Public Goods Price of Public Goods o DA*B DA s Quantiy of Public Goods
  11. • Public goods and private goods is depicted in diagrams (1) and (2) . We consider the demand for a private and a public good by two individuals, A and B. • The demand curves for the public good are hypothetical since consumers do not reveal their demand for the commodity. Private good: demand of individual A and the demand of individual B are summed up horizontally to gain the market demand curve.
  12. • Public good: demand curves are summed up vertically to gain the market demand curve. Private good: the amount demanded at a particular price varies according to individual A and B. • Public good: the quantity consumed by each individual remains the same while the price the individuals are willing to pay differs according to our hypothetically constructed demand curves.
  13. SHARING THE COST • A price has to be paid even in the case of public goods when Total Cost > O even if MC = O. • The method of distributing the cost of public goods between individuals depends on political ideology. • There are two main methods of allocating the burden of public good provision: 1. Benefit Approach 2. Ability to Pay Approach
  14. BENEFIT APPROACH 1. Bowen model 2. Lindhal model
  15. 1.Bowen Model • Bowen's model adopts a similar diagram to public goods • Only difference : vertical axis is denoted benefit rather than price of the public good.
  16. Bowen Model Benefit Quantity of Public Goods
  17. • The benefit gained from the public good are reflected by the demand curves of the individuals, while the market demand curve is gained by adding these demand curves vertically. • Here individual A pays 0M while individual B pays OL out of the expenditure per unit of the public good which is OK. ON is the optimal output level.
  18. 2. Lindhal Model •This model was introduced by Erik Lindhal to analyse the distribution of the cost of a public good. • It incorporates the following assumptions: V Society has a single public good V There are 2 individuals V Production is under a fixed cost so the marginal cost of production is zero V Income distribution pattern is optimal
  19. Lindhal Model Fraction 1<-100 of cost provided by A 75 40 30 I-K=O Fraction of cost DB provided 40 60 90 I-K=IOO
  20. • The vertical axis shows the share of the price paid by A as a percentage. If c is the price, then it is assumed that A pays a share of kc while B pays a share (I-k)c. The two individuals are able to use each others demand curves as the supply curve of the public good. At the intersection of DA and DB the price shares the two Individuals are willing to pay sums to 1. At QI A is willing to pay 75% of the price B is willing to pay 90% of the price • Here since the price share percentages add up to more than 100%, the good need not be supplied by the government. AtQ2 A is willing to pay 30% of the price B is willing to pay 40% of the price • Even together the two individuals cannot bear the cost of the product. At Q A is willing to pay 40% of the price B is willing to pay 60% of the price • This is considered the optimal level of output.
  21. THE ABILITY TO PAY APPROACH (Pigou Approach) Pigou argues that when a government imposes a tax the resources of the private sector are transferred to the government. • This imposes an opportunity cost. This is equal to the amount of private goods sacrificed. • Therefore in the provision of public goods private goods need to be sacrificed.
  22. Ability to Pay approach MUG NET MU MUT Quantity of Public Good
  23. • In producing public/social goods total utility rises. But it faces the law of diminishing marginal returns. • On the other hand the imposition of taxes leads to negative utility (disutility) increasing as the tax level increases. • According to Pigou the optimum level of public goods is determined at the point when net marginal utility is zero. • That is to say when the utility of public goods provided is equal to the disutility of the level of taxes.
  24. Public Goods and the Free Rider Problem • The Free-Rider Problem • A free rider is a person who consumes a good without paying for it. • Some will pay but all will not pay • Why ?
  25. Solutions to the Free Rider Problem • Government intervention can potentially lead to a more efficient outcome. • Government can use legal power to force people to pay for public goods, through taxation. • But all are not paying • Tax avoidance and evasion • Equity concern • What next option? • Privatization • Mix of private and public provision 25

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