Lecture 3 - Public goods Flashcards

1
Q

Non-excludability - definition

A

Not possible, or only at an excessive cost, to prevent others from consuming the good once provided i.e. non-excludable only if costs of doing so outweigh benefits

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2
Q

Non-rivalry - definition

A

One’s consumption has zero opportunity cost, does not reduce the amount others can consume.
-> matter of degree: many goods are non-rival up to a point where additional people impose congestion costs (e.g. art galleries)

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3
Q

Experimental evidence on free-riding

A

Most studies find that participants make greater contributions to the public good than theory suggests.
-> altruism, norms and other non-economic motivations limit the extent of free-riding

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4
Q

Volunteer-type public goods - definition and result

A

Public good provided if one person contributes, e.g. who will pick up the rock from the road
-> social optima are asymmetrical outcomes (e.g. one of the two contributes, only)

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5
Q

Weakest-link-type public goods - definition, example and result

A

Provided at a level equal to the lowest individual contribution (eg. flood defence on island)
-> no free rider problem but coordination needed to get to the best outcome

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6
Q

Efficient provision of public goods - condition and result

A

Samuelson Condtion: ∑MRS = MRT , as each additional unit of public good benefits each person
-> incentive to misrepresent preferences, either understating to avoid taxes and free-ride or overstating if it isn’t expected to influence taxes paid

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7
Q

Demand curves for public and private goods

A

Public goods: added vertically to show total WTP for a given amount of public good
Private goods: added horizontally to show total quantity wanted at a given price

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8
Q

Lindahl procedure - definition, equilibrium, 2 results

A

Tax shares paid by individuals increase with their demand (<=> personalised prices).
An equilibrium is a set of ‘Lindahl prices’ such that everyone demands the same amount of the public good.
-> satisfies the Samuelson condition
-> but strong incentive to lie so as to pay less taxes while getting nearly the same amount of the public good

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9
Q

Bohm’s experiment - result

A

No significant difference in WTPs for different payment schemes, some of which were expected to have downward (/upward) biased answers.

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10
Q

2 incentive compatible mechanisms

A

1) Vickrey / Second Price auction -> truthful bidding is weakly dominant
2) Clarke-Groves demand-revealing process -> no incentive to lie

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11
Q

Properties of the Clarke-Groves mechanism (3)

A

1) Voter only pays when decisive
2) Tax never exceeds benefits received (only the amount needed to swing the decision)
3) No incentive to misrepresent preferences

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12
Q

Problem of Clarke-Groves mechanism

A

What to do with the tax revenue?

  • > Can’t be used for the project as it would distort incentives.
  • > waste from throwing it away may exceed the benefits to society from implementing the policy
  • > problem diminishes as the number of individuals increases.
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13
Q

Majority voting equilibrium

A
  • > Median voter is decisive
  • > no incentive to lie, as moving to the other side of the MV moves the outcome away from preferred level (same direction as lie)
  • > inefficient, unless MV’s prefs coincide with mean prefs
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14
Q

Impure public goods (3 cases)

A

1) Congested goods: as # of consumers rises, total benefits rise but benefits per consumer falls (art gallery, roads)
2) Club goods: excludable, with congestion. Private provision is feasible and possibly efficient
3) Local public goods: not necessarily rival or congested (eg. public park)

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15
Q

Buchanan’s club model

A

Club should increase its membership fee up to where marginal disutility to members is EXACTLY offset by additional fee from incoming member

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16
Q

Tax in Clarke-Grove mechanism (when proposition A wins against B)

A

If John voted for A and Sum of everyone else A < Sum of B then John pays Sum of B - Sum of everyone else A