Ch 11

Public Good

Public Good
A public good is a good that provides benefits to all consumers simultaneously and that its seller cannot exclude anyone from obtaining its benefits. Features of Public Good:
provides benefits to all consumers simultaneously Concurrent consumption seller cannot exclude anyone from obtaining its benefits non-exclusive

Features of Public Good

Concurrent consumption (Non-rival):
the consumption of it by one person does not affect the quantity available to other consumers. The simultaneous consumption of the same unit of the good is possible. Only one unit is enough to satisfy all the consumers. The marginal cost of serving one more consumer is zero.

Features of Public Good

Non-exclusive:
No one can be excluded from obtaining the benefits from it, once it is produced. The consumer can enjoy the good even if he does not pay for it.

Public Good
Example:
Victoria Park The sunshine A piece of music Television broadcasting Police protection March Tunnel (before reaching the full capacity)

Public Good
Question: Is this pair of earphone a public good?

No! Rival and exclusive Private Good

Public Good
Question:

Is this public good? No! Non-rival but exclusive

Public Good
Question: Is a public BBQ site a public good?

No! Non-exclusive but rival.

Public Good
Many good itself are public good in nature, but the sellers create some sorts of barriers in order to exclude non-paid consumers.
Film broadcasting Cinema Teaching lecture room MTR gates Computer software license and code

Efficiency
What is the optimal level of output of a public good? The optimal level is reached when the market demand = market supply Assuming that the public good is produced by the competitive firms. Market supply = Marginal cost

Efficiency
Question: How could we get the market demand of a public good? Market demand of a public good is the vertical summation of each individual demand. PMarket = Pi

Market Demand of Public Good

There are two consumers: 10
Consumer A with demand DA. Consumer B with demand DB. 6 2 The maximum willing to pay for the 1st unit = $2 + $4 = $6 The maximum willing to pay for the 2nd unit = $2 (only A is willing to pay for it) If P = $10, Q = 0 Market demand = DM 1
Consumer A Market

In the market:

DM 2 3

4 2

DA Consumer B

6 4 2

DB

Efficiency
Question: If the MC = $6 per unit, what is the optimal Market level?
10 6 1 2 MC=S DM 3

Optimal level: Q = 1

Efficiency
Question: Will the optimal level be produced? No! There will be the Free-Rider problem. Free-Rider: the person who wants to enjoy the benefit of the good but refuse to contribute. Because of the Free-Rider problem, private investment of public good will be very unlikely.

Free-Rider Problem
The cost of producing the public good = $100 The two consumers will share the cost equally. Each consumer derive $80 benefit from consumption. The two consumers are free from choosing to contribute or free-ride. As the two consumers make their decisions interdependently, we can use the game

Free-Rider Problem
B

A contribute Free-ride

contribute 30; 30 80; -20

Free-ride -20; 80 0; 0

N.E.

In equilibrium, nobody will contribute to the production of the good. The equilibrium output level is smaller than the optimal level. DWL > 0

Provision of Public Good

Because the market itself cannot allocate resources efficiently, Market Failure occurs in the public good market. Usually, public goods are provided by Government.
Public Road National Defense

So long as the producers cannot exclude the free-rider, there is seldom private provision of public good.

Provision of Public Good

Question: Why people produce video and broadcast it in Youtube? People preference are not identical!

Provision of Public Good

Two students join together to do a project. The teacher cannot distinguish the contribution of each student. Student A targets at A+ in this course. Student B wants to pass the course only. Student B evaluates leisure higher than Student A.

Provision of Public Good

B

A contribute Free-ride

contribute A+; B A+ +; B -

Free-ride A+ -; B + B; C

N.E.

As B evaluates leisure more, is large. As A evaluates leisure less, is small. > . If the preference of one person is high enough, he may be willing to provide the public good solely.

Conclusion
If the good is non-rival and non-exclusive in nature, it is known as Public good. Because of the problem of free-riding, public good is usually provided by government instead of private provision. Market fails to allocate resources efficiently for public goods. Under some situations, private provision of public goods is possible.