Chapter 4

Public Goods

Public Goods

Public Goods are goods for which

exclusion is impossible.
One example is National Defense: A
military that defends one citizen
from invasion does so for the entire
public.

Characteristics of Public Goods

Nonexclusion: The inability of a seller to

prevent people from consuming a good if
they do not pay for it.

Nonrivalry: The characteristic that if one

person consumes a good, another persons
pleasure is not diminished, nor is another
person prevented from consuming it.
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Pure Public Goods and

Pure Private Goods

Pure Public Good: No ability to exclude

and no rivalry for benefits.
Pure Private Good: Clear ability to
exclude and rivalry for benefits.

Marginal Costs for Provision of

Public Goods

The marginal cost of allowing

another person to benefit from a
pure public good is zero, while the
marginal cost of providing a
greater level of public good is
positive.
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Figure 4.1 Marginal Costs of Consuming and Producing

a Pure Public Good-Figure A

Cost (Dollars)

200

Marginal Cost of Allowing an

Additional Person to Consume a
Given Quantity of Pure Public Good

Number of Consumers
6

Figure 4.1 Marginal Costs of Consuming and Producing

a Pure Public Good--Figure B
Marginal Cost of Producing
a Pure Public Good
MC = AC

Cost (Dollars)

200

0 Units of a Pure Public Good per Year

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Example:Bread versus Heat

Bread Clearly a pure private good

because there is the ability to exclude
and there is rivalry to consume.

Heat Clearly a pure public good

because there is no ability to exclude
and there is no rivalry to consume.
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Provision of Private Good and

Public Goods: Markets and
Government

Price Excludable Public Goods

vs
Congestible Public Goods
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Price Excludable Public Goods

Excludability, but no rivalry

Another type of good is a priceexcludable public good: no rivalry but

exclusion is easy.
Examples: Country Clubs, Cable TV

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Congestible Public Goods

Rivalry but no excludability

There are public goods where, after a

point, the enjoyment received by the
consumer is diminished by crowding or
congestion. These are called
Congestible Public Goods.

Examples: roads and parks

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Marginal Cost

Figure 4.2 A Congestible Public Good

Marginal Cost per User

Number of Consumers per Hour

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Figure 4.3 Classifying Goods According to the Degree of

Rivalry and Excludability of Benefits from Their Use
1

A
C

Excludability

B
0

Rivalry

1
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Education as a Public Good

Education is a service that has some characteristics of a

public good and some characteristics of a private good.
External benefits

It helps us live in a civil society.

It has a socializing function.
It teaches the importance of following rules, obeying orders,
and working together.
It provides students with basic skills like punctuality and the
ability to follow directions that increase their productivity as
workers.
It helps students identify their abilities and choose appropriate
occupations, thereby increasing productivity levels for a nation.

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Education as a Private Good

Education has characteristics of a private good.

Wide disparities exist in the quantity and quality of

education provided among school districts.
The level of support that parents can give students at
home increases with income and home support is an
important factor in learning for children.
There is no way to prevent parents who want more
than a standardized quantity and quality of education
for their children from buying it in the marketplace.
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Demand For a Pure Public Good

Market demand for a Pure Private

Good is derived by adding quantities
demanded at each price.
Demand for a Pure Public Good is
derived by adding how much people
will be willing to pay at each quantity.

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Price per Loaf of Bread (Dollars)

Figure 4.4 Demand For a Private Good

7
6
5
4

S = MC = AC
D = QD

DC = MBC
DB = MBA
DA = MBA

2
1
0

Loaves of Bread Purchased per Week

10
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Marginal Benefit (Dollars)

Figure 4.5 Demand For A Pure Public Good

800
700
600
500
400
300
200
100
0

Z1
Z2
Z3
Z4
D= MBA
DA = MBA
DB = MBB
DC = MBC
1
2
3
4
Security Guards per Week

5
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Marginal Benefit (Dollars)

Figure 4.6 Efficient Output for a Pure Public Good

800
700
600
500
400
300
200
100
0

MC = AC = MSB
D= MBi = MSB
MBA
MBB
MBC

1
2
3
4
Security Guards per Week

5
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Efficient Output of a
Pure 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

Lindahl Pricing: Everyone in a group cooperates and

participants each pay their marginal benefit.
We can demonstrate this issue mathematically,
numerically (using a table), and graphically.
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Mathematically: Lindahl 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.
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Numerically: Lindahl Pricing

Suppose we have three people who

are discussing the issue of hiring
security guards. Note that each
person places a different value on
the levels of security.

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A Numerical Example
Number of Security Guards per Week
1
2
3
4
MBA

$300

$250

$200

$150

MBB

$250

$200

$150

$100

MBC

$200

$150

$100

$50

MB

$750

$600

$450

$300

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).

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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.

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Freeriding

Freeriding occurs when people

are not honest in stating their
Marginal Benefit, because if
they understate it, they can get
a slightly reduced level of the
public good while paying
nothing for it.
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Freeriding is easier with

Anonymity: If everyone knows who

contributes, there can be powerful social
stigmas applied to shirkers.

Large numbers of people: Its easier to

determine the shirkers in a small group and
the punishment is more profound when
people close to you shun you for not paying
your share.
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Illustrating Voluntary Contributions

to a Public Good: The Gulf War

Under the premise that defeating Iraq in the

Gulf War in 1990 was a public good to be
consumed by the industrialized economies
and Arab nations, each nation was expected
to contribute.
The U.S. and UK contributed the bulk of the
fighting forces.
Saudi Arabia, Kuwait, the UAE, Japan, and
Germany voluntarily paid $54 billion of the
estimated $61 billion cost.
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National Defense and Homeland

Security

National defense is a classic example of a public good.

Defense

From 1968 to 1978, defense spending fell from 9% of GDP to 5%.

Between 1978 and 1986, it increased to 6.3%.
By 1999, it had fallen to less than 4%.
In 2002, it was 4.5%.

Homeland Security
The new department merged several agencies from the departments
of Justice, Transportation, Treasury, Agriculture, Energy, Health
and Human Services, and Commerce.

The Homeland Security Department could ultimately have 170,000

employees working in border and transportation security,
emergency preparedness and response, biological warfare defense,
and computer security. It will also house the Secret Service and
Coast Guard.

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