lecture 4 - public goods

Flashcards about the definitions and concepts relating to public goods.

What distinguishes public goods from private goods?

Non-rival consumption and non-excludability.

Why do private markets undersupply pure public goods?

Due to the free rider problem.

What is non-rival consumption?

One person's use of a good does not prevent another person from using it.

What is non-excludability?

It is not possible to exclude individuals from the benefits of a good without incurring great cost.

Give an example of a good with rival consumption and excludability

An i-Phone

What is a pure public good?

A good with non-rival consumption and non-excludability.

Give an example of a pure public good.

Street lighting or national defense.

What is a reason for public provision of public goods?

Market failure.

What is the result of exclusion via prices for non-rival goods?

Underconsumption.

What problem does non-exclusion lead to?

Undersupply.

What happens even if there is some private provision of public goods?

There will be an undersupply.

What is the free rider problem?

The reluctance of individuals to contribute voluntarily to the support of public goods.

How does public provision address the free rider problem?

Taxation.

Define a pure public good.

Perfectly non-rival consumption and non-excludability; the marginal cost of providing it to an additional person is strictly zero.

What problem is associated with non-excludability?

Free rider problem and undersupply.

What are three methods of rationing publicly provided goods?

User charges, uniform provision, and queuing.

What is saved when using the uniform provision method?

Transaction costs.

What is an efficiency condition for the public good provision?

The marginal social benefit of the public good equals the marginal social costs.

What is the result of free-riding with public goods?

Understating the preference for the public good to shift the burden of payment onto others.

What is a budget constraint on public goods?

C + pG = Y, where C = cons private good, G = cons public good, P = tax price, and Y = income

What does the efficient production of public goods require?

Collective demand equals the sum of marginal rates of substitution.