Week 6 - Public Goods

What are the two main properties of private goods?

Rivalry and exclusion.

Define non-rivalry in the context of public goods.

Everyone can consume the good at once; an extra unit has zero social marginal cost of consumption.

What does non-excludability mean?

It is impossible to exclude individuals from consuming the good.

Give an example of a public good.

Clean air, public safety, flood defenses, streetlights.

How is market demand for a public good calculated?

By the vertical sum of individual demands (adding willingness to pay at each quantity).

What is the efficient output condition for public goods?

At the efficient output, marginal cost (MC) equals the aggregate demand (DA).

What is the Pareto-efficient public good provision?

Maximize utility subject to resource constraints, ensuring no one can be made better off without making someone else worse off.

What is the Samuelson Rule?

For public goods, efficiency requires that the sum of marginal rates of substitution (MRS) across consumers equals the marginal rate of transformation (MRT).

What is the free rider problem?

Individuals benefit from a public good without contributing to its cost, leading to underprovision.

Describe the Tragedy of the Commons.

Open-access common property can be overexploited when individuals act without coordination.

What happens in a Nash Equilibrium regarding voluntary contributions to public goods?

Best responses intersect, leading to a level of public good provision that may be inefficient.

What is the outcome when individuals act in open access scenarios?

Over-extraction occurs, leading to resource depletion.

What is the difference between public and private goods in terms of demand aggregation?

Public goods use vertical aggregation of demand, while private goods use horizontal aggregation.

What is the budget constraint for individual A contributing to a public good?

ωA = xA + GA, where GA is A's contribution to the public good.

How do individual contributions affect public good provision?

Contributions can lead to underprovision due to free riding unless individuals coordinate.

What is the implication of Pareto efficiency in public goods?

It requires that the sum of the marginal rates of substitution equals one.

What is the condition for efficient provision of private goods?

MC = DM, where DM is the demand for the private good.

What is the significance of the First-Order Conditions in Lagrangian optimization?

They help find the optimal allocation of resources to maximize utility under constraints.

What does the term 'aggregate resource constraint' refer to?

xA + xB + G = ωA + ωB, representing the total resources available.

What is the result of individual A and B both contributing to a public good?

They may reach a Nash Equilibrium where both contribute, but it may still be inefficient.

How does the social planner's outcome differ from open access outcomes?

The social planner maximizes total profit, while open access leads to overgrazing or overfishing.

What happens to the payoffs in a free riding scenario?

Individuals may end up with lower payoffs than if they coordinated their contributions.

What is the implication of the condition MRSA + MRSB > MRT?

It indicates underprovision of the public good, as social benefits exceed the costs.

What is the relationship between individual willingness to pay and public good provision?

Individual willingness to pay aggregates vertically for public goods, influencing overall provision.

How does the concept of externalities relate to public goods?

Public goods create positive externalities, as one person's consumption benefits others.

What is the role of the marginal rate of transformation (MRT) in public goods?

MRT represents the rate at which one good can be transformed into a public good efficiently.