CHAPTER

5
Public Goods

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

Public Goods
Many

definitions in use
Focus on characteristics that might cause
resources to be misallocated
Not just public provision
One of two characteristics:
Collective

Consumption
Nonexcludability
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

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Collective Consumption Goods

Consumption

by one consumer will not

reduce the consumption of any other
consumer
MC = 0
Example: radio broadcast signal

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-3

The Argument for Public

Sector Production
At

efficient output level P=MC

MC = 0 for collective consumption good
For efficiency, P = 0
Private sector will not produce efficient
level of output
Solution: Government production at zero
price
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

5-4

The Argument for Private

Sector Production
Lack

of congestion might be because of

past overproduction
Private production provides a revealed
price mechanism
Public production is financed through
taxation
Benefits

of production vs. excess burden

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-5

Congestion of Collective
Consumption Goods
Collective

consumption goods can

become congested
Collective consumption is an economic
concept, not technological
Cannot evaluate based on goods
characteristics
Example: swimming pool
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

5-6

The Optimal Output of a

Collective Consumption Good
Private

consumption goods

Market

demand determined by horizontally

summing individual demand curves

Collective

consumption goods

Market

demand determined by vertically

summing individual demand curves

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-7

The Optimal Output of a

Collective Consumption Good

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-8

Lindahl Pricing
Set

so each individual pays a marginal

price equal to the marginal benefit that
individual receives
Not necessary for the efficient level of
output
Individuals

cannot adjust individual quantity

consumed
Price does not have to equal consumers
marginal valuation to be efficient

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-9

Lindahl Pricing
Advantage:

everyone prefers same level

of output
Increases likelihood that efficient level of
output is chosen
Practicality?
Earmarked

gasoline taxes
Financing public education through property
taxation
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

5-10

Pure and Impure Collective

Consumption Goods
If

each consumers consumption share is a

function of total output, optimality
condition holds regardless whether public
or private good
Anytime consumer cannot quantity
adjusted, optimality condition holds
Example: public education
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe

5-11

Nonexcludability
Once

produced, it is difficult to keep

people from consuming the good
Unrelated to collective consumption
Does not have to be publicly provided
Example: National defense

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-12

Nonexcludability as a
Prisoners Dilemma
Free

riding
Incentive to benefit from the good
without contributing to production
Self-interest = everyone free rides
Inability to cooperate leads to prisoners
dilemma

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-13

Nonexcludability as a
Prisoners Dilemma

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-14

Nonexcludability and Collective

Consumption in Public Goods
Public

goods embody two characteristics

Only one is needed to be a public good
Some have elements of both
Pure private good
Excludable,

Pure

private in consumption

public good

Nonexcludable,

collective consumption

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-15

Nonexcludability and Collective

Consumption in Public Goods
Pure

private good

Excludable,

Pure

private in consumption

public good

Nonexcludable,

collective consumption

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-16

Nonexcludability and Collective

Consumption in Public Goods

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-17

Public Policy Towards Public

Goods
Public

goods do not have to be produced

publicly
Examples:
Microcomputer

software

Television
Radio

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

5-18