Unit 5 – Market Failure and the
Role of Government
Public Goods
What are the characteristics of Public Goods?
1. Nonrivalry: one person’s consumption of a
public good does not prevent someone else
from consuming it.
2. Nonexludability: Once a public good has been
provided, the producer cannot prevent people
that have not paid for it from receiving the
benefits. This leads to the free rider problem.
Examples?
Note: There is a positive externality
associated with public goods.
Deriving the Demand Curve for Public Goods.
1. To find the demand for a public good, add up
all individuals’ marginal benefit (that is, the
price they are willing to pay) at any given
quantity.
DemandLily+Natalie+Danny = DemandPublic
Now suppose that Danny is the one who decides
to puts on fireworks displays every summer.
Here is the marginal cost data for fireworks
displays: Quantity
1
2
3
4
Marginal
Cost
$4.00
$7.50
$11.00
$15.50
To your graph of public demand, add this
marginal cost data and Danny’s private demand
curve.
MPC = MSC
DDanny
DemandLily+Natalie+Danny = DemandPublic
QD
QEF
Price (1000s of $)
40
30
20
MPC=MSC
DPublic
10
DAubrey
0
6
4
2
Quantity (acres of land in park)
8