Public Goods
Mr. Henry
AP Economics
• Private Goods include automobiles, clothing, personal
computers, household appliances, and sporting goods.
• Private good characteristics include:
A. Rivalry in consumption (I buy a Pepsi, it is not available
to you!)
B. Excludability (only people who pay get the benefits ie I
buy the Pepsi, I enjoy it!)
Review
• Have rational behavior (want • A competitive market not only
to get “the most for their
makes private goods available
money”) aka maximize their
to consumers but also
total utility
allocates society’s resources
efficiently to the particular
• Each consumer has clear-cut
product
preferences of the goods
and services that are
• There is neither
available in the market; pay
underproduction nor
market price or go without it
overproduction of the product
Typical Consumers
in the Competitive
Market…
• Public Goods characteristics include:
A. Nonrivalry in consumption (everyone can obtain the
benefit from a public good)
B. Nonexcludability (once in place, you cannot exclude
someone from benefiting)
What are examples of Public Goods??
Public Goods
• Nonrivalry & nonexcludability create a free-rider problem.
• What do you think the “Free-Rider” problem is for Public
Goods?
• What are examples of the “Free-Rider” problem?
Quantity of the Public good
• Since we do not know how much
demand there truly is for a public
good, government has to try to
estimate the demand for a public
good in order to compare Marginal
Benefit to the government’s Marginal
Cost
• What are ways in which government
can measure the demand for public
goods?
Demand for Public Goods
• Demand for a public good is unusual;
maybe a gov’t survey asking hypothetical
questions about how much each citizen
was willing to pay for various types &
amounts of public goods rather than go
without them.
• The supply curve for any good, private or
public, is its MC curve. MC rises as more
of a good is produced (because of law of
diminishing returns / fixed resources)
Cost-Benefit Analysis
• When comparing MB to MC,
government uses cost-benefit
analysis for deciding whether to
provide a public good and how much
of it to provide.
• Remember your example of costbenefit analysis?
• What would a government example
be of cost-benefit analysis??
Example:
• In this example, the marginal-cost-marginal-benefit rule
tells society which plan provides the maximum excess of
total benefits over total costs, or in other words, the plan
that provides society with the maximum net benefit.
Here, Plan C, a new 4-lane highway, is the best plan.
• What problems do you see in society with cost-benefit
analysis for Public Goods?
HW: Externalities 340-347