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Lecture 8: Public Goods - Harvard University

Lecture 8: Public GoodsStefanie StantchevaFall 2017131 Public Goods : DEFINITIONSPure Public Goods : Goods that are perfectlynon-rival in consumptionandarenon-excludableNon-rival in consumption: One individual s consumption of a good doesnot affect another s opportunity to consume the : Individuals cannot deny each other the opportunity toconsume a Public Goods : Goods that satisfy the two Public good conditions(non-rival in consumption and non-excludable) to some extent, but not Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers5of 28C H A P T E R 7 P U B L I C G O O D Pure and Impure Public GoodsIs the good rival in consumption?Is thegood excludable?YesNoYesPrivate good (ice cream)Impurepublic good (Cable TV)NoImpure Public good (crowded sidewalk) Public good (defense)OPTIMAL PROVISION OF PRIVATE GOODSTwo Goods :ic(ice-cream) andc(cookies) with pricesPic,PcPc=1is normalized to one (num raire good ):Two individualsBandJdemand different quantities of the good at thesame market ,c=MUic/MUc= # cookies the consumer is willing to give up for 1ice-creamThe optimality condition for the consumption of private Goods is written as:MRSBic,c=MRSJic,c=Pic/Pc=PicEquilibri um on the supply side requires:MCic=PicIn equilibrium, therefore:MRSBic,c=MRSJic,c=MC431 Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers8of 28C H A P T E R 7 P U B L I C G O O D SPr

Free rider problem: When an investment has a personal cost but a common benefit, individuals will underinvest. Because of the free rider problem, the private market undersupplies public goods Another way to see it: private provision of a public good creates a positive externality (as everybody else benefits) ⇒Goods with positive externalities

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