Public goods Flashcards
What are the two key features of a public good?
Non excludability = you cant stop people from benefiting
Non-Rival = one persons consumption does reduce another’s
Give 2 examples of public goods
National defence
Lighthouse
What is the efficiency condition for public good provision?
The sum of individuals marginal willingness to pay should equal marginal cost:
∑MRS = MC
What is MRS?
marginal rate of substitution
How much someone is willing to give up to get more of another while keeping their utility the same
How does MRS relate to Public goods?
Marginal value someone places on the public good in terms of a private good (usually money or consumption)
What is the role of MRS in the Efficiency Condition?
The sum of all individuals’ marginal values for the public good should equal the marginal cost of providing it
Why do private markets under provide public goods?
Because of the free rider problem - no incentive to pay voluntarily
What is the free rider problem?
When people benefit from a good without contributing, leading to its under provision
What is the paradox of voting?
When collective preferences are not transitive
A > B, B > C but C > A
What is the pivotal agent in the Groves-Clarke Mechanism?
An individual whose stated valuation changes the decision to provide or not provide the public good
How does the Groves - Clarke tax solve strategic misreporting?
It taxes pivotal agents the harm they impose on others, incentivising truthful reporting
What are some limitations of the Groves-Clarke Mechanism?
Large tax burdens only works with Quasilinear preferences doesn’t guarantee Pareto efficiency?
What does Quasilinear mean?
A person’s marginal utility of income/money stays constant, regardless of how much of the other good they consume.
