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BADM 780 - Lecture 4 Notes

This document discusses public goods and their optimal provision. It provides examples of public goods like lighthouses, national defense, highways, and education. Public goods are non-rival and non-excludable. There is an underprovision of public goods in the private market due to free riders who benefit without paying. While private providers can sometimes overcome this by charging user fees, there are still problems with measuring costs/benefits of public goods and determining public preferences that make optimal provision challenging without government involvement.

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71 views2 pages

BADM 780 - Lecture 4 Notes

This document discusses public goods and their optimal provision. It provides examples of public goods like lighthouses, national defense, highways, and education. Public goods are non-rival and non-excludable. There is an underprovision of public goods in the private market due to free riders who benefit without paying. While private providers can sometimes overcome this by charging user fees, there are still problems with measuring costs/benefits of public goods and determining public preferences that make optimal provision challenging without government involvement.

Uploaded by

Harris
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BADM 780 – Lecture 4: Public Goods

Public Goods:

 Public vs. private goods


 Public goods and externalities
 Examples of public goods
o Light house
o National Defense
o Highways
o Education
 Regional and international public goods
o Conflict prevention, Antarctic commons
Antarctic Commons:

 Antarctica
o No population, no sovereign nation, but important economic issues
 Private goods
o Peace, science
 Commons
o International externalities, tragedy of the commons
Optimal Provision of Public Goods:

 Pure public goods


o Goods that are purely non-rival in consumption and are non-excludable
 Non-rival in consumption
o One individual’s consumption of a good does not affect another’s opportunity to consume
the good
 Non-excludable
o Individuals cannot deny each other the opportunity to enjoy a good
 Impure public goods
o Goods that satisfy the two public conditions (non-rival in consumption and non-
excludable) to some extent, but not fully
 Underprovision of public goods can result in market failures
Private Sector Underprovision:

 Free rider problem


o When an investment has a personal cost but a common benefit, individuals will
underinvest
o The free rider problem is one of the most powerful concepts in all of economics.
o Everyday examples include:
 WNYC has an estimated listening audience of 1 million people, but only 7.5% of
their listeners support the station. In the UK, the BBC charges an annual
licensing fee to anyone who owns and operates a TV
 Can private providers overcome the free rider problem?
o The free rider problem does not lead to a complete absence of private provision of public
goods
o The private sector can in some cases combat the free rider problem to provide public
goods by charging user fees that are proportional to their valuation of the public good
 When is private provision likely to overcome the free rider problem?
o Private provision is particularly likely to surmount the free rider problem when
individuals are not identical, and when some individuals have an especially high demand
for the public good
o Altruism – When individuals value the benefits and costs to others in making their
consumption choices
o Social capital – The value of altruistic and communal behavior in society
o Warm glow model – Model of public goods provision in which individuals care about
both the total amount of the public good and their particular contributions.
 Three problems due to:
o Private response to public provision (crowd-out)
 Crowd out – As the government provides more of a public good,
the private sector will provide less
o Difficulty in measuring costs and benefits of public goods
o Difficulty in determining the public’s preferences for public goods

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