18 Public Goods Flashcards
When do market failures arise? (4)
Market failures arise when the implicit assumptions we make no longer hold including:
- All buyers and sellers are price-takers
- All contracts are complete
- No transaction costs
- Transactions only affects buyers and sellers
When do externalities occur?
Externalities occur when the actions of one economic agent affect another other than through the price mechanism or the market transaction.
Two key features of public goods, explained
Non-rival
- If one person’s consumption of it does not diminish its availability for anyone else.
Non-excludable
- If, once provided, it isn’t possible to prevent anyone from consuming it.
What are club goods?
Club good - non-rival but excludable. This reduces problems.
What are common goods?
Common good - non-excludable but rival. This increases problems: “Tragedy of the commons”.
Assuming they spend all their income, how will they optimally chose x and g?
Draw the diagram for this
The MRS<em>x,g</em> gives their willingness to pay for g, in units of x.
How can individual benefit and the public benefit be shown?
By merging the entities involved.
- This internalises the externality
- They then act in a jointly optimal way, which must be efficient.
So society’s willingness to pay for the public good is the (vertical) sum of the individual willingnesses to pay for a good - Pareto optimum.
Suppose g < g* and consider a small increase, how do we show everyone’s gain and cost diagrammatically?
How does summing for AD differ between private and public goods?
For private goods, you sum individual demand curves in the horizontal direction (adding quantities).
For public goods, you sum them in the vertical direction (add willingnesses-to-pay).
Consider a private goods market, with a Red’s and Blue’s demand curves, how do we show aggregate demand? Why?
Consider a public goods market, with a Red’s and Blue’s demand curves, how do we show aggregate demand? Why?
Implication of Mr Homo Economicus on public goods
What is the publig good game (payoff grid)?
Given public good game, when is the best response to free-ride?
