H OW U S E R S C H A RG E S F O R P U B L I C G O O D S C A N B E S E T TO A C H I E V E EFFICIENT LEVEL OF OUTPUT?

PRESENTED BY : NURUL SYAHIDA BINTI HASSAN NOOR SHAFIQAH BINTI RAMLY

OBJECTIVES OF THE STUDY

To define the public goods and discuss their characteristics.
To discuss when should a public good be provided. To determine the reasons for charges the consumption of public goods. To determine the conditions for efficient output of public goods To discuss the way to achieve efficient level of output. To explain the Lindahl equilibrium.

WHAT IS PUBLIC GOODS?

A public good is provided efficiently at the level where the combined marginal rate of

substitution of all individuals is equals to the

marginal rate of transformation.

C H A R AC TE R IS T IC O F P U B L I C GOODS

P R I C E E XC LU DAB L E P U B L I C GOODS
There are external benefits when produced or consumed but exclusion is easy.

Example : Country Clubs

C O N G E S T IB LE P U B L I C GOODS
There are public goods where after a point, the enjoyment received by the consumer is diminished

by crowding or congestion.

Example : roads and parks

Examples of PUBLIC GOOD

WHEN SHOULD PUBLIC GOOD BE PROVIDED?

When the individuals are willing to pay for the public good, then the
government should provide the public goods. Ex: Wana and Ayu wants to have a aquatic museum (like AQUARIA) in their residential area. Wana is prepared to pay up to RM25 for the entrance fee, while Ayu is willing to pay up to RM15. the total value to the two individuals of having the park is RM40. if the cost of maintenance is RM30, there is a RM10 gain on its production since it provides service that

the community values at RM40 at a cost of maintenance only RM30.

W H Y C H A RG E F O R P U B L I C S E RV I C E S?
1.Economic rational a) To improve the efficiency with which the users (Malaysian) in general and federal public agencies in particular make use of resources they have available. b) To clients promote are economic efficiency to pay by for providing particular

information to public sector suppliers on how much actually willing services.

2. Government policy
a. To charge for many publicly provided goods

and services. This approach helps allocate

use of goods or services in a rational way

because it prevents waste through excessive or badly targeted consumption.

b. It also makes for easier comparisons with the

private sector, promotes competition and helps develop markets.

EFFICIENT OUTPUT OF A PUBLIC GOOD

Use LINDAHL EQUILIBRIUM. Voluntary contribution = MB

FIGURE 4.6 EFFICIENT OUTPUT OF A PUBLIC GOOD

800 Marginal Benefit (Dollars)

700
600 500 400 300 200 D= MBi = MSB MBA MBB MBC 1 2 3 4 5

MC = AC = MSB

100
0

Security Guards per Week

As before, assume that the public good is available to the community at constant marginal cost, indicated by the curve MC. We adopt the convention that tax-prices per unit of the good are to be uniform over various quantities for each person, although, of course, these need not be uniform as among separate persons. This step allows us to derive demand curves for the public good in the orthodox fashion. Conceptually, we simply confront each individual with the opportunity to purchase or to vote for a most preferred quantity at each price (marginal = average).

HOW TO ACHIEVE EFFICIENT LEVEL OF OUTPUT?

Lindahl equilibrium can be achieved by assigning each participant a Lindahl price per unit of the public good.

The socially optimal level of the public good requires that we set the Marginal Social Benefit of

that good equal to its Marginal Social Cost.

MSB = MSC

M AT H E MAT ICA L LY: LI NDAH L PRICING

Recall from Figure 4.5 that the marginal social benefit for a pure public good is the sum of the individual marginal benefits. That is : MSB = MB.

Efficient output is therefore:

MSB = MB = MSC.

A NUMERICAL EXAMPLE
Number of Security Guards per Week 1 2 3 4 $300 $250 $200 $150
$250 $200 $150 $100 $200 $150 $100 $50 $750 $600 $450 $300

MBA MBB MBC MB

If the cost of security guards is $450 per week, then no individual will hire even one guard, even though to the group one guard is worth $750. The group should hire three. If they each pay their marginal benefit, then three guards are hired. Person A pays $600 ($200 per guard), person B pays $450 ($150 per guard) and person C pay $300 ($100 per guard).

LINDAHL EQUILIBRIUM
The amount each person contributes, ti, depends on individual desires for the public good. The sum of the contributions equals the total cost of the public good.
tiQ* = MC(Q*) = AC(Q*) ti = MC = AC

All individuals agree to pay their shares.