Public Goods

explain non rival and non excludable

non-rival — something everyone can consume

non-excludable — everyone is able to consume the goods

explain club goods and give an example

club goods are goods that individuals can be prevented from consuming but are available to others

ex. tolled roads

explain common resources and give an example

common reosuces are goods anyone can use but are limited

ex. fresh water, fish, ect.

what are the 2 forms of inefficiencies

1. under consumption

2. under supply

what is this graph and what is it telling us

under consumption graph — tells us that when price is set to 0 (green line) everyone consumes the bridge, but the bridge needs to be paid for, hence the governement chooses to add a toll which limits the people who can use it

(in a sense your not maximizing the capacity as the number of people who use it decreased)

explain the inefficiency of undersupply

free rider probelm — people assume that others would contribute more leading to them either contributing less or none at all as they would benefit eitherway ( no one has incentive to contribute)

what is a numeraire good

good that is used as the benchmark to measure prices (usually =1)

when can we say that a private good is optimally provisioned

explain the optimality condition of private goods

since MRS is defined as the rate at which one is willing to give up one good for another, we can say that private goods are optimally provisioned if each individuals MRS (ratio of MU) equals the price ratio

• this works as it tells us that for every price level, the individuals are willing to consume x amount of each good—therefore MRS = P

On the supply side P = MC as it shows the equilibria where firms are willing to provide

— MRS = MC as it gives both the price consumers are willing to pay and the supply firms are willing to produce

breifly explain how to get the market supply and demand

add the qty demanded for A and B, then see at which price their equilibrium qty meets price

explain the optimal condition for public goods

since everyone benefits simultaneously, we have to add up the valuation of all individuals WTP

its equal to MC as it guarantees the right amount of production

explain the graph

vertical summation as the quantity would become consumed by everyone, prices are added because its the total benefit to society

explain the difference of provisions for private vs public goods

Private — people only consider thier own benefits

Public — adding together all individuals WTP allows for the chance to purchase the societial optimal qty which would benefit everyone (parang nag pondohan)

can private provision overcome free rider problem

while it may aid, its not enough to reach socially optimal level

Factors that encourage private provision:

1. differences in demand for public goods — some value it more than others are may be willing to fund it

2. altruism — people genuinely care and are willing to contribute out of generosity

3. utility from ones own contribution (warm glow) — personal satisfaction from helping

public provision of public goods

gov can help but it comes with inefficiencies:

1. crowding-out effect — gov providing may redue private sectors contribution as theyd feel less inclined to give

2. difficulty inmeasuring cost and benefits — as everyone can consume the good, everyone benefits regardless of hm they pay, it becomes hard to measure everyones WTP

3. difficulty in determining public preferences — since its “free” people may not reveal thier true demand (like building a park, how much would people actually use it?)

full vs partial crowd out

full — when the amount priv sector reduces is the same amount gov provided

partial — when the amount priv sector reduces is less than the amount gov provided