Chapter 4 – Public Goods
Chapter 4 – Public Goods
1.
3.
a.
Wilderness area is an impure public good – at some point, consumption becomes
nonrival; it is, however, nonexcludable.
b.
Water from a municipal water supply is both rival in consumption and excludable.
My consumption of water precludes you from consuming the same water, thus it is
rival. The municipality can control who consumes water by shutting off the flow
to customers, thus it is excludable. This is a useful question for showing that not
all publicly owned facilities are public goods.
c.
Medical school education is a private good.
d.
Television signals are nonrival in consumption.
e.
An Internet site is nonrival in consumption (although it is excludable).
A pure public good is nonrival in consumption, thus it is necessary to determine whether
or not this is the case with the highway. That is, if the additional cost of another person
“consuming” the highway is zero, then it is a public good. So, as long as the highway is
not congested, then it can be considered to be a public good. However, adding another
motorist to an already congested roadway can cause traffic jams that cost motorists more
time to travel the highway, which would represent nonzero costs to having an additional
person use the highway. Therefore, the congestion of the roadway determines whether or
not we could designate it as a public good. Note that we are assuming throughout that the
highway is nonexcludable.
To determine whether or not the privatization of the highway is a sensible idea, it is
necessary to consider the advantages and disadvantages of such an action. First, if the
market structure is such that privatizing the highway would result in a monopolist in
control of the highway, then this would be inefficient. Also, it would be difficult for the
government to write a complete contract for maintaining the highway, which would also
cause inefficiencies that would result from the privatization of the road. However, if the
government owns the highway, it might not have the appropriate incentives to maintain it
properly. In such a case, even ownership by a private monopolist might be a sensible
solution.
6.
As noted on page 65 of the textbook, the experimental results of Palfrey and Prisbrey
(1997) suggest that there is some free riding, but some people do contribute. Those
authors found that, on average, people contribute a portion of their resources to the
provision of a public good, and there is some free riding. That was the case in
Manchester, Vermont. Also, Palfrey and Prisbrey found that when the experimental
game was repeated, people were more likely to free ride. This also happened in
Manchester -- in the second year, participation was less.
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Part 2 – Analysis of Public Expenditure
9.
In this case, the apartment’s temperature is a public good because for the “society” of
Rodolfo and Mimi, the temperature is nonrival and nonexcludable. Both get to
“consume” a warmer house, and neither can exclude the other from this. The marginal
benefit for society is the sum of Rodolfo’s and Mimi’s marginal benefit – e.g., $20 at 66
degrees, $17 at 67 degrees, $13 at 68 degrees, $8 at 69 degrees, and $4 at 70 degrees.
The marginal benefit for society equals the marginal cost at 67 degrees; for temperatures
higher than that, the marginal cost is greater than the marginal benefit for society.
10.
Thelma’s marginal benefit is MBTHELMA=12-Z, and Louise’s is MBLOUISE=8-2Z. The
marginal benefit for society as a whole is the sum of the two marginal benefits, or
MB=20-3Z (for Z≤4), and is equal to Thelma’s marginal benefit schedule afterwards (for
Z>4). The marginal cost is constant at MC=16. Setting MB=MC along the first segment
gives 20-3Z=16, or Z=4/3, which is the efficient level of snowplowing. Note that if
either Thelma or Louise had to pay for the entire cost herself, no snowplowing would
occur since the marginal cost of $16 exceeds either of their individual marginal benefits
from the first unit ($12 or $8). Thus, this is clearly a situation when the private market
does not work very well. Also note, however, that if the marginal cost were somewhat
lower, (e.g., MC≤8), then it is possible that Louise could credibly free ride, and Thelma
would provide the efficient allocation. This occurs because if Thelma believes that
Louise will free ride, Thelma provides her optimal allocation, which occurs on the second
segment of society’s MB curve, which is identical to Thelma’s MB curve (note that
Louise gets zero marginal benefit for Z>4). Since Louise is completely satiated with this
good at Z=4, her threat to free ride is credit if Thelma provides Z>4.
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