Week 11_Lec 2 Public Goods and publically provided private goods.pptx

Public Goods and publicly provided private goods

1. Chapter 5: Public Goods And Publically Provided Private Goods ‹#›

2. Contents In these slides you will learn about, Public Goods, Impure Public Goods Publicly Provided Private Goods Rationing Devices for Publicly Provided Private Goods Efficiency Condition for Public Goods ‹#›

3. Public Goods Goods which are having two characteristics: Non Rivalry in Consumption (ii) Non Excludability With non-rival consumption , it is not desirable to exclude anyone from the benefits. With private provision, there will be under consumption and/ or undersupply. With non-excludability , it is not feasible to exclude anyone from the benefits of the good. There will be a free rider problem. Such goods typically cannot be provided by the market, and when they are privately provided, they will be undersupplied. ‹#›

4. Examples of Public goods are; Defense, Lighthouse, street Lamp, clean air etc. ‹#›

5. Impure Public Goods Those goods/services which have any one of the two characteristics of public goods. Examples: Congestion on roads, Tolls Tax etc. Private Goods The goods which don’t have these two characteristics. These goods are produced and provided through free market mechanism. Examples: Coca Cola, Pizza, Public Housing etc. ‹#›

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8. Publicly Provided Private Goods Publicly provided goods for which there is a large marginal cost associated with supplying additional individuals are referred to as publicly provided private goods. E.g. Education. Sometimes when the government provides a private good publicly (like water), it simply allows individuals to consume as much as they want without charge. ‹#›

9. For these goods, there is a marginal cost associated with each unit consumed. It costs money to purify water and to deliver it from the source to the individual’s home. If a private good is provided freely, there is likely to be overconsumption of the good. Because individuals do not have to pay for the good, they will demand it until the point at which the marginal benefit they receive from the good is zero, in spite of the fact that there is a positive marginal cost associated with providing it. ‹#›

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12. When marginal cost associated with each individual using a good ‹#›

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14. Rationing Devices for Publicly Provided Private Goods Given the inefficiencies arising from overconsumption when no charges are imposed for publicly provided private goods, governments often try to find some way of limiting consumption. Any method restricting consumption of a good is called a rationing system . Prices provide one rationing system. User Fee Uniform Provision Queuing ‹#›

15. Rationing Devices for Publicly Provided Private Goods ‹#› (i) User Fees

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18. Uniform Provision A second commonly employed way of rationing publicly provided goods is uniform provision: supplying the same quantity of the good to everyone. Thus, we typically provide a uniform level of free education to all individuals, even though some individuals would like to have more and some less. (Those who would like to purchase more may be able to purchase supplemental educational services like tutoring on the private market.) This, then, is the major disadvantage of the public provision of goods; it does not allow for adaptation to differences in individuals’ needs and desires as does the private market. ‹#›

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20. The government chooses to supply each individual with a quantity that is somewhere in between, Q*. At this level of consumption, the high demander is consuming less than he or she would like; the high demander’s marginal willingness to pay exceeds the marginal cost of production. On the other hand, the low demander is consuming more than the efficient level; his or her marginal willingness to pay is less than the marginal cost. (Because the low demander does not have to pay anything for it, and still values the good positively, he or she, of course, consumes up to Q*.) ‹#›

21. Queuing A third method of rationing that is commonly employed by the government is queuing: rather than charging individuals money for access to the publicly provided goods or services, the government requires that they pay a cost in waiting time. This allows some adaptability of the level of supply to the needs of the individual. Those whose demand for medical services is stronger are more willing to wait in the doctor’s office. It is claimed that money is an undesirable basis upon which to ration medical services. ‹#›

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23. Efficiency Conditions for Public Goods ‹#›

24. Demand Curves for Public Goods ‹#›

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26. Demand Curves for Public Goods ‹#›

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29. Collective Demand for Public Goods ‹#›

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31. Efficient Production of Public Goods ‹#›

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