Public Goods Flashcards
How do we define public goods?
This is a good that has to be distributed equally to all affected agents. (will consist of more than 2 agents minimum).
Examples include national defence, roads, water etc.
What is a reservation price?
This is the maximum amount that a consumer would be willing to pay to acquire a good - they are indifferent after this point between acquiring and failing to acquire that good.
How can we understand if there is a Pareto-improvement to be made with a public good?
This can be determined by confirming that the reservation prices are greater than actual cost of the public good. Then, a payment plan can be created.
Reservation prices are often determined by the initial distribution of agents’ wealth.
When is the provision of a public good independent of the distribution of wealth?
When preferences are quasilinear.
What is the ‘free-rider’ problem?
This is when an agent hopes to consume a good without contributing to it’s purchase/cost.
How do we determine the efficient amount of a public good and how does this differ from choosing efficient amount of a private good?
MC = Sum of MRS.
Private consumption only requires MC=MRS.
What is the paradox of voting?
Only being able to vote once on a certain topic allows the vote to be decided in order of preference. Some voters will not choose their preferred option in fear of other voters getting their preferences.
What is the ‘Vickery-Clarkes-Groves Mechanism’?
This is used to try and get every voter to tell the truth when it comes to deciding how much of a public good should be provided.
Each agent is asked how much they would be willing to pay for the good ( a measure of utility) but they are also told that the level of the good that will be provided will be a sum of all the agent’s utilities - hence, they have incentive to tell the truth about their private utility.
Asking each agent can be very costly. So taxes can be applied based on sum of social utility -
This way, each agent benefits from the social decision of purchasing their good (and their own level of utility) but also will have to pay for the total utility of others.
Doing this allows us to calculate how much of a public good should be provided.
What is the dominant strategy under a VCG mechanism?
To tell the truth.
What are some examples of VCG in practice?
- Vickery auctions
- When buying a public good (like two flatmates buying a TV)
How is the cost to each individual calculated in VCG mechanism?
By taking away how much utility that individual takes away from the social utility.
Or in other words, a comparison of if that agent existed (sharing more social utility) with if that agent did not exist (more utility for others).
When is an agent considered pivotal in VCG mechanism?
When their presence affects the social utility outcome.
What are some issues with the VCG mechanism?
- They only work with quasilinear preferences (as your utility is solely influenced by how much you are willing to pay). Thus, there is a constant level of indifference.
- Taxes paid by pivotal people will decrease their private consumption, meaning that a Pareto-inefficient outcome will be reached.
- If two non-pivotal agents colluded but don’t pay tax.
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