Public Goods

Question 1

Public good refers to two concepts

Answer 1

1. The definition that economists use
2. How the term is understood by the public

Question 2

Rival

Answer 2

consumption by one party reduces the ability of others to consume it

Question 3

Excludable

Answer 3

people can be prevented from consuming it
- non-excludable have a positive provision externality

Question 4

Private Goods

Answer 4

excludable and rival
- efficiently provided for by the private sector
ex: Most consumer goods

Question 5

Club Goods

Answer 5

excludable but non-rival
- efficiently provided for by the private sector
ex: Many goods on the internet

Question 6

Pure Public Goods

Answer 6

non-excludable and non-rival
positive production externality
ex: National defense

Question 7

Common Goods

Answer 7

non-excludable but rival
- ex: natural resources & public services

Question 8

Tragedy of the Commons

Answer 8

common goods are over-used & degraded

Question 9

Common goods have two types of externalities

Answer 9

negative usage externality
positive provision externality

Question 10

Common goods have two market failures

Answer 10

Overused by the market & under provided by the market

Question 11

market eq

Answer 11

PMB = PMC
also where, SMB = SMC

Question 12

Market supply curve

Answer 12

PMC. If no externalities, PMC = SMC

Question 13

Market demand curve

Answer 13

the horizontal sum of the individual. demand curves
– Is also the private marginal benefit curve, the PMB
– Represents the benefits to consumers from purchasing one more unit
– If no externalities, PMB = SMB

Question 14

SMB curve

Answer 14

the vertical sum of the individual demand curve

Question 15

Lindahl Pricing

Answer 15

Charge each person a price = to their marginal WTP at the efficient q

Question 16

Lindahl pricing has two nice features

Answer 16

Feasible & Efficient

Question 17

Lindahl Pricing rules

Answer 17

1. Pooling our resources and buying a q. where the sum of m. WTP = MC
2. Charging each person their marginal WTP at this quantity

Question 18

Free Riding

Answer 18

People under-report their demand and consume the good without paying

Question 19

Bc of free-riding

Answer 19

Lindahl pricing leads to underprovision

Question 20

Tiebout Model

Answer 20

local governments provide public goods and differ in the amount they tax their citizens for the good. People move to the town that provides the amount of the goods they want at the level of taxes they want

Question 21

Tiebout Model Assumptions

Answer 21

1. Infinite # of towns that differ in taxes & public goods
2. People are fully informed about each town’s offerings
3. People have free mobility between towns
4. Towns charge residents a fixed (“lump-sum”) tax

Question 22

Tiebout Model Implications

Answer 22

1. There is no way for someone to free-ride by understating their demand
2. The world reaches an equilibrium called the Tiebout equilibrium
3. . The Tiebout equilibrium involves perfect residential sorting

Question 23

Efficiency of the Tiebout Model

Answer 23

1. Efficient level of public goods spending
2. Efficient payment structure for public goods
3. Efficient conversion of tax revenue into public goods provision

Question 24

Issues of Tiebout Model

Answer 24

Assumptions are not true - too simplified and unrealistic

Question 25

what local provision does

Answer 25

– Converts non-excludable public goods into excludable club goods
– The exclusion happens at the level of the municipality

Question 26

Equity Implications of the Tiebout Model

Answer 26

People with fewer resources get worse public goods and thus the tiebout model causes poorer people to get worse public goods

Question 27

equity implications can be fixed

Answer 27

by supplementing with federal funding