Public Goods

Question 1

What criteria does good have to meet to be public good?

Answer 1

Non-excludable and non-rival

Question 1

What is non-rival in consumption? What are the examples?

Answer 1

One person’s consumption of a good does not affect someone else’s consumption of the same good. MC = 0. National defense - if there is one more additional person moving in Lithuania, that does not affect the national defense.

Question 2

What is non-excludable? What are the examples?

Answer 2

You can’t stop someone else from enjoying the use of good. For example, streetlights, sunshine.

Question 3

What are impure public goods?

Answer 3

Goods that are non-rival in consumption and non-excludable to some extent, but not fully.

Question 5

Is hospital rival in consumption? Is it excludable?

Answer 5

Yes, when you come you are using the hospital’s resources, therefore MC is huge.
Yes, it is excludable because when you come to the hospital doctors might not want to treat you.

Question 6

When the government should involve?

Answer 6

When you have private goods and they are experiencing market failure.

Question 7

What is marginal rate of substitution?

Answer 7

Number of good you are willing to give up for the other good.

Question 8

In optimum how will people behave?

Answer 8

People will be consuming and buying stuff such that their MRS (marginal rate of substitution) equals to price ratio.

Question 9

What is marginal utility?

Answer 9

Extra happiness you are getting from extra cookie/ice cream.

Question 10

What condition must be met in order for you to not change your consumption?

Answer 10

The happiness per money spent on ice cream should be equal your happiness per money spent on cookie. And if that’s not the case, there is something wrong and you need to change your consumption.

Question 11

If you are getting more happines per euro spent on ice cream, then you would spend … money on cookies.

Answer 11

less. And you would buy more ice cream.

Question 12

What happens if you spend less on one good than the other?

Answer 12

The MU for good that you spent less will go up.

Question 13

What happens if you spend more on one good than the other?

Answer 13

The MU for good that you spent more will go down.

Question 14

What condition can be followed from MU going down for one good and going up for the other good?

Answer 14

They equalise.

Question 15

How we arrive at market optimum with the quantities demanded differently from private goods?

Answer 15

We add the demand curves horizontally, which means that we add the quantity demanded for good of one person and add the quantity demanded for the other person.

Question 16

How we arrive at market optimum when we have public goods?

Answer 16

We do vertical summation, which is when you add up the prices demanded from person 1 and person 2. You leave the same quantities, just when the price differs from each person, you add them up.

Question 17

What condition with MRS must be met in free market?

Answer 17

MRS = MC

Question 18

Why we are not maximizing the utility for society when we have a public good?

Answer 18

MRS > MC

Question 19

What is free rider problem?

Answer 19

When people enjoy public goods provided by others, they will underinvest in that public good.

Question 20

Why should the government get involved when we ar talking about public goods?

Answer 20

Public goods create public externalities.

Question 21

Why we would use log to determine people’s utility?

Answer 21

Because it is diminishing (at small amounts utility increases, at large amounts utility decreases).

Question 22

What is reaction function?

Answer 22

Your optimal condition, utility maximizing depends on other person.

Question 23

What is Nash equilibrium?

Answer 23

Each agent maximizes its objective taking as given of actions of other agents.

Question 24

Private provision works better when:

Answer 24

1. Some people care more than the others, so they can provide more goods.
2. Altruism - helping other people brings you happiness.
3. Warm Glow - if other people see you giving money, then they will think higher of you and that is why you do it.

Question 25

Can income inequality lead to more public goods?

Answer 25

For example, Bill Gates, Andrew Carnegie are very rich, therefore they want to give back to society by providing public goods. So, you end up seeing huge private provision of public goods when you have high levels of inequality in your country.

Question 26

What is homo economicus?

Answer 26

A person who we imagine in our models, who’s perfectly rational utility maximizing, completely selfish.

Question 27

In the example about money and students experiments, what is Nash equilibrium?

Answer 27

Get everything in cash.

Question 28

In the example about money and students experiment, what is Socially optimal equilibrium?

Answer 28

Contribute everything to public good.

Question 29

Where contributing to public good works, why?

Answer 29

This would work in small community, but the bigger it gets it cannot be done without government intervention. This would not work because at first people ar selfless but when they see that others are not acting the same as them, they would be acting differently and we would arrive at Nash equilibrium.

Question 30

How about crowd out (public and private goods)?

Answer 30

Government spending on public goods crowds out over private goods.

Question 31

What two empirical methods are used on crowding out?

Answer 31

1) Observational studies
2) Lab experiments

Question 32

How government spending crowds out private donations to the public sector (e.g. public radio)?

Answer 32

The government comes and gives money, then private donations go down.

Question 33

Why increase in government donations reduces private fund-raising?

Answer 33

Private sectors have enough money, so they don’t need additional investments.
Citizens would think that they don’t need to give money, since they got money from the government.

Question 34

Can private spending crowd out government spending?

Answer 34

Yes, if the government does not support for example, schools, they get the investment from private sector and the money can be allocated more thoughtfully and be given to for example, defense, while the schools are still getting the same amount of money.

Question 35

What is reverse crowd out?

Answer 35

When government’s spending on public goods, increases the spending in private goods. For example, if government spends more on public projects it might increase the demand, also governmental spending increases the overall welfare of the economy, so the businesses thrive from it.

Question 36

What is reciprocity?

Answer 36

Reciprocity is a social and psychological concept that refers to the practice of exchanging things, services, or favors with others in a mutual and often informal agreement.

Question 37

What is Tragedy of the Commons?

Answer 37

Common area in Medieval England, that basically everybody owned, it was non-excludable. Also, each person who used the land MC was very small. If everyone ends up using this land with their livestock, the grass is gone and the public good as well.

Question 38

Where today we can see the Tragedy of the Commons? Explain.

Answer 38

In the fishing sector. Fishing in the oceans are a public good. As the technologies increased and more and more fish were caught, we got ourselves in the Tragedy of the Commons. All are worse off, huge market failure.

Question 39

How we can solve the fishing problem?

Answer 39

1. Make fishing inefficient (costs are too high).
2. Limit fishing times and create quota.

Question 40

Why putting quota on fishing is not a good thing?

Answer 40

Fishermans became more competitive and bought bigger ships, more people died. Herring (a small fish) season in Alaska lasted 4 hours. New technologies cut costs for fisherman - overharvesting still occurred.

Question 41

What is the Coasian solution to fishing problem?

Answer 41

Individual Transferrable Quotas - instead of giving the quota for how many fish you can catch, you own the percentage of the total catch, which gives you the property rights.