Unit 6
Chapter 18
Public Goods
I. Characteristics of Goods
a) Excludable: Supplier can prevent people who do
not pay for it from consuming it.
b) Rival in Consumption: Same unit of a good cannot
be consumed by more than one person at a time.
• IF A GOOD MEETS BOTH OF THESE CHARACTERISTICS
IT IS A PRIVATE GOOD
I. Characteristics of Goods
c) Nonexcludable: supplier of product cannot
prevent consumption by people who do not pay
for it.
d) Nonrival in Consumption: more than one person
can consume the same unit of the good at the
same time.
• GOOD THAT MEET THESE TWO CHARACTERISTICS ARE
CALLED PUBLIC GOODS.
II. Summary of different
types of goods
There are four types of goods:
Private
goods, which are excludable and rival in consumption, like wheat
Public goods, which are nonexcludable and nonrival in consumption, like a public
sewer system
Common resources, which are nonexcludable but rival in consumption, like clean
water in a river
Artificially scarce goods, which are excludable but nonrival in consumption, like
pay-per-view movies on cable TV
Rival in consumption
Private goods
Excludable
Artificially scarce goods
• Wheat
• Pay-per-view movies
• Bathroom fixtures
• Computer software
Common resources
Nonexcludable
Nonrival in consumption
Public goods
• Clean water
• Public sanitation
• Biodiversity
• National defense
Public Goods
If there was no government, how would
schools, parks, and freeways be
different?
Would there be enough to meet our
needs?
6
The Free Rider Problem: People that
benefit from something without
paying for it.
Examples:
1. People who download music illegally
2. People who watch a street performer and don’t pay
3. Teenagers that live at home and don’t have a job
7
What’s wrong with this picture?
8
Does anyone free ride off you?
•Canadian
Military
Spending:
$21.8 Billion
•US Military
Spending:
$660 Billion
Why doesn’t
Canada spend
more on their
military?
9
The Final Exam
•I am willing to give a 100% on the final
exam to whichever class gives me $1000.
•Everyone in the class will get 100%
even if they don’t pay.
•Who is willing to pay?
•What about those that refuse to pay?
Solution?
EVERYONE pays a mandatory tax
and all receive the same benefits.
10
Identify which of the following are
TRUE public goods
(have non-exclusion and non-rival
consumption):
1. Hamburgers
2. Satellite TV
3. Free Public Education
4. Homes
5. Street lights
11
How do we decide
how many public
goods we need?
12
How does the government determine
what quantity of public goods to
produce?
They use Supply and Demand
Demand for Public GoodsThe Marginal Social Benefit of the
good determined by citizens
willingness to pay.
Supply of Public GoodsThe Marginal Social Cost of providing
each additional quantity.
Demand for a New Park
Marginal willingness to pay higher taxes
# of
Parks
1
2
3
4
5
Assume:Marginal
Adam is
Jill is
Society’s
willing to willing to Demand
Cost
1. There are
only
pay
pay
for Parks
two people in
$4
$3
$2
$1
$0
$5
$4
$3
$2
$1
society. $5
$9
2. Each additional
$7
$5
park costs $5
$5
$5
How many parks
$3
$5
should be made?
$1
$5
Demand for a New Park
Marginal willingness to pay higher taxes
# of
Parks
1
2
3
4
5
Adam is
Jill is
Society’s Marginal
willing to willing to Demand Cost per
pay
pay
(MSB)
Park
$4
$3
$2
$1
$0
$5
$4
$3
$2
$1
$9
$7
$5
$3
$1
$5
$5
$5
$5
$5
Demand for a New Park
Marginal willingness to pay higher taxes
# of
Parks
1
2
3
4
5
Adam is
Jill is
Society’s Marginal
willing to willing to Demand
Social
pay
pay
(MSB)
Cost
$4
$3
$2
$1
$0
$5
$4
$3
$2
$1
$9
$7
$5
$3
$1
$5
$5
$5
$5
$5
Supply and Demand for Public Parks
Price
The Demand is
the equal to the
marginal
benefit to
society
$9
7
5
3
1
D=MSB
0
1
2
3
4
Quantity of Parks
5
Supply and Demand for Public Parks
1.
Price
$9
2.
What if the government made 1
park?
What if the government made 4
parks?
7
MSB = MSC
S=MSC
5
The supply is
the public
good’s marginal
cost to society
3
1
0
1
2
D=MSB
3
4
Quantity of Parks
5