Chapter 13: Public Goods
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References:
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Advanced Level Microeconomics, LAM pun-lee, CH
18
A-Level Microeconomics, CHAN & KWOK, CH 17
HKALE Microeconomics, LEUNG man-por, CH 19
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private Goods
A good is a private good if its
consumption by any one person would
reduce the amount available for others.
 Examples:
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Ice-cream
Chewing cum
A pair of shoes
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Public Goods
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A good is a public good if its consumption by
any one person does not reduce the amount
available for others, i.e. it can be
c__________________ consumed by many
individuals at the same time.
The MC of serving an additional user is z____.
Examples:
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An outdoor circus, national defence, a battleship
and a TV programme
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private vs. Public Goods
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A private good is of rivalry and exclusive
consumption while a public good is nonr_________ and non-e______________
in nature.
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private vs. Public Goods
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However, whether a good is public or
private is a often a matter of degree.
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A good could no longer be equally available
to all when it reaches its c___________ limit,
e.g. an outdoor circus.
Even capacity limits are not met, a good
may be of different q_____________ as the
number of users increases, e.g. battleship.
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private vs. Public Goods
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Question 1: Explain whether the following
products are public goods.
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courts
police & firemen
flood control measures
knowledge
stories, songs & poems
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private vs. Public Goods
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7
Question 2: Is a public good the same as
a free good?
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Market Demand Curve for a
Public Good
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As a public good can be concurrently
consumed by many individuals at the same
time, its value is the sum of the MUVs placed
on each unit by ALL individuals consuming the
good.
Therefore, we can derive the market demand
curve for a public good by adding together all
individuals’ demands v_____________ (for
reflecting their MUVs)..
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Market Demand Curve for a
Public Good
P
MUV1
MUVA
0
Units of a public good
P
MUV2
MUV3
0
P
MUVB
Units of a public good
MUV(1+2)
MUV3
0
9
MUV(A+B)
Units
Q1
Q2
CH13-Public Goods/Ver 2004
of a public good
Mr. LAU san-fat
Pricing Problems of Public
Goods
1.
The problem of joint
supply/i________________:
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10
A public good is in joint supply in the
sense that once it is produced, any given
unit of the good can be made equally
available to all.
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Pricing Problems of Public
Goods
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Restricting the use of a public good
constitutes a waste in terms of a loss in
the total use value derived from the good
(area
)
P
D = MUV
P1
11
0
Q2
CH13-Public Goods/Ver 2004
Q1
Qty
Mr. LAU san-fat
Pricing Problems of Public
Goods
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12
If charging a price on a public good
constitutes a waste, that good should be
available free of charge, however, if so, how
would its production costs be financed?
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Pricing Problems of Public
Goods
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The problem of marginal cost pricing
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As the MC of accommodating an additional
consumer is essentially zero, any person
should be allowed to use a public good free
of charge as long as a positive use value
can be derived.
However, there is fixed costs of production,
declining but still positive average cost and
total cost.
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Pricing Problems of Public
Goods
3. The problem of exclusion/f____-r______
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With concurrent consumption, people who
do not pay voluntarily for the public good
cannot be excluded from the benefits.
There exist high transaction costs in
excluding non-payers, i.e. free-riders, or in
enforcing e______________ in the case of
a public good.
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private Production of Public
Goods
1. A lump-sum fee charging
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An individual is allowed to use a public
good without restriction after paying a
lump-sum fee just below his or her MUV for
that good.
However, the information costs in
measuring one's true use value is
prohibitively high as each individual tends
to understate his or her own use value in
order to maximize his or her wealth.
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private Production of Public
Goods
2. Practicing perfect price discrimination
 An individual is allowed to use a public
good without restriction after paying a
lump-sum fee just below his or her MUV for
that good.
 However, the information costs in
measuring one's true use value is
prohibitively high as each individual tends
to understate his or her own use value in
order to maximize his or her wealth.
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CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private Production of Public
Goods
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Granting patents and copyrights
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Users of a public good with patents or
copyrights have to pay royalties, thus
restricting the consumption of that good.
Question 3: In order to maximize social
benefits, the MP3 music or songs should
be allowed to download freely from the
Internet. Agree?
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private Production of Public
Goods
Though the MC of reproducing the music
or song via downloading is almost zero,
there is a high fixed cost of financing its
original production.
 Allowing free downloading without paying
royalty would discourage people's
incentive to create, invent and innovate.
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CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private Production of Public
Goods
3. Charging time price
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The consumers of a public good may have
to pay for it in terms of the time they spend
in listening to or watching the
advertisements.
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Private Production of Public
Goods
R. Coase finds that the British lighthouse
system was provided by private
enterprises in the nineteenth century.
 The role of the government was limited to
establishing and enforcing p__________
r________ to the lighthouses.
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20
CH13-Public Goods/Ver 2004
Mr. LAU san-fat
Further Reference Readings

張五常＜賣桔者言＞
1.
2.
21
燈塔的故事
高斯的燈塔
CH13-Public Goods/Ver 2004
Mr. LAU san-fat