Public Sector: Public Goods (L4-

Lindahl Pricing 3 steps:

1) Ask how much of private goods individuals would want if they had to pay certain price

2) Find level of private good for which individual MBs = MC of public good

3) Provide efficient amount and charge individuals their MB at that P

3 problems of Lindahl pricing

1) Assumes individuals know and can quantify MB

2) Collecting info is costly

3) Individuals may misreport MBs

How could the government avoid the issue of misreporting benefits?

Clarke tax

With a Clarke tax how much does Andy pay if (RB < C/2 but the dams still built)

C/2 + (C/2 - RB)

With a Clarke tax how much does Beth pay if (RA > C/2 but the dams not built)

RA - C/2

Define local public good

goods or services that are excludable and non-rivalrous, provided by local governments for the benefit of a specific community or region. Examples include street lighting, public parks, and waste management services.

What L is the main theme of the Tiebout model

Localities

3 costs of the Tiebout model

Travel not costless, Won’t be enough localities to fit all preferences, Unrealistic to assume individuals know wxactly what to expect

4 sources of mkt failure

Market power, Externalities, Asymmetric information, Public Goods

Write down the maximization problem with the inverse demand function

max P(Q).Q - C(Q)

Marginal Revenue equation

P(Q) + P’(Q).Q

how does Marginal Revenue equation prove monopolists optimal choice is inefficient

P’(Q) < 0 as demand is downward sloping so MR < Demand(P(Q)