Lecture 2: Public Goods

Question 1

Market efficiency

Answer 1

The equilibrium quantity supplied of a given good should be such that the marginal profit of the producer is equal to the marginal benefit of the consumer
Not all goods can be sufficiently supplied by the private market
That is: the quantity produced by the market in equilibrium (where supply and demand meet) is sub-optimal

Question 2

Characteristics of Goods

Answer 2

Excludable: Preventing anyone from using the good is relatively easy
Non-excludable: Preventing anyone from consuming the good is either very expensive or impossible
Rival: Once provided, the additional resource cost of another person consuming the good is positive
Non-rival: Once provided, the additional resource cost of another person consuming the good is zero

Question 3

Types of goods

Answer 3

Rival and excludable: Private
Rival and non-excludable: Common good
Non-Rizal and excludable: Club Goods
Non-Rivale and Non-Excludable: Public Goods

Question 4

Efficiency in the supply of goods (Partial Equilibrium)

Answer 4

Private goods: MC=p=MB^A=MB^B
Public Goods: MC=p=MB^A+MB^B

Question 5

Lindahl Equilibrium

Answer 5

Under which conditions does the private sector supply an efficient quantity of public goods?

Given that the marginal valuation of the public good is different across agents, a price system “ad personam” is able to guarantee an efficient supply of the public good
The efficient supply requires that the marginal cost MCg of the public good (marginal cost of unit) is equal to the sum of individual contributions i g = MCg
Pig = personalized price of the public good g for agent i

Question 6

Market equilibrium with private goods

Answer 6

Same price for everyone, different quantities for each individual

Question 7

Lindahl equilibrium with public goods

Answer 7

Same quantity for everyone, different prices for each individual (personalized prices)

The Eq is based on voluntary contribution and therefore not guaranteed (Free rider Problem)

Question 8

Problem with private supply of public good

Answer 8

In the presence of non-rival and non-excludable goods, private supplier will have a hard time in supplying an efficient quantity of such goods

Question 9

Clarke Tax

Answer 9

Revelation of preference over public goods
A government has to decide whether to supply a public good (eg public park) to n agents
The total cost is C
Each agent announces their own valuation Vi (they may declare anything, not necessarily their true valuation)
If SVi>C, the public good is supplied
An agent is pivotal if by declaring their valuation they may change the decision on whether to supply or not the public good
Each agent I contributes to the public good (if supplied) by paying C/n, if they are not pivotal
Instead, if pivotal, they will have to pay (the sum of the declared valuations of all other agents) Ti=Sj≠I vj*
By applying this rule everyone has an incentive to truthfully reveal their own private valuation of the public good (dominant strategy for everyone)