lecture 22

Question 1

what characteristics must have a public good?

Answer 1

• non-rival → once the good is available, the marginal cost of making it available to additional people is zero
• that is ,the consumption of the public good by one individual does not affect its consumptions by other people
• non-excludable → it is impossible to exclude anyone from having acess to it
• that is, cannot restrict acess and usage

Ex:
- provided by the government→ national defense, legal system, lighthouses, official statistics, fire protection, …
- other source of provision → clean air, open-souce software, knowledge, …

Question 2

what is a good rival and excludable?

Answer 2

private goods (food, clothes, houses)

Question 3

what is a non-rival and excludable good?

Answer 3

public goods that are artificially scarce (subscription TV, uncongested toll roads, knowledge subject to intellectual property rights, …)

Question 4

what is a rival and non-excludable good?

Answer 4

common-pool resouces (fish stocks in a lake, common grazing land, …)

Question 5

what is a non-rival and a non-excludable good?

Answer 5

pure public goods and bads (view of a luna eclipse, public broadcaste, rules of arithmetic or calculus, national defence, noise and air pollution, …)

Question 6

Why does the market fail with public goods?

Answer 6

• when good are non-rival
• the additional cost of providing the good to more people is zero
• settig price equal to marginal cost will not be possible unless the provider is subsidized (supported financially)
• but a necessary condition for a pareto-efficiency in competitive markets was P=mc
• when goods are non excludable
• we cannot exclude people whohaven’t paid from having acess to the good
• key problem → free rider
• in sum, the provision of public goods is not profitable for firms and to costly for most individuals (under-provision of goods)

Question 7

why do individuals underprovide public goods?

Answer 7

• intuition → key factor: good is non-excludable
• even if i do not contribute to the rovision of the good, i can still use it
• no incentives to contribute

Question 8

how to find the optimal level of provision of a public good?

Answer 8

• when the marginal cost of providing the good (MC) is equal to the sum of the marginal benefit (MBi) of the good for each individual in a society

Question 9

why do governments intervene?

Answer 9

• externalities
• public goods
• imperfect competition
• inequality
• …