Professorship in Faculty 07

Federal and Regional Financial Relations Prof. Dr. André W. Heinemann Business Studies & Economics

Public Sector Economics

Chapter 3
Theory of Public Goods and Club Goods
3.1 Public Goods vs. Private Goods

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3.1 Public Goods vs. Private Goods

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3.1 Public Goods vs. Private Goods
What is a Public Good?

 Classification of Public Goods

- Non-Rivalry in Consumption
- Non-Excludability

 Types of Public Poods

- Pure Public Goods
- Common Goods
- Congestion Goods

 Examples?

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3.1 Public Goods vs. Private Goods
Exclusion and Rivalry in Consumption

Excludability

possible not possible

rivalry 1 2
Consumption
non-rivalry 3 4

Type 1: Pure private good

Type 2: Common good
Type 3: Artificially scarce good
Type 4: Pure public good

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3.2 Efficient Provision
Individual Marginal Willingness to Pay

𝐷𝐵

𝐷𝐴

𝑥𝑃𝑢

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3.2 Efficient Provision
Vertikal Summation of Individual Demand Curves

𝐷 𝐴 + 𝐷𝐵

𝐷𝐵

𝐷𝐴

𝑥𝑃𝑢

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3.2 Efficient Provision
Efficient Provision of a Public Good

𝐷 𝐴 + 𝐷𝐵

𝐷𝐵

𝑀𝐶
𝐷𝐴

∗
𝑥𝑃𝑢 𝑥𝑃𝑢

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3.2 Efficient Provision
Efficiency

 SAMUELSON Condition:
Sum of Individual Marginal Willingness to Pay equals Marginal Costs

𝐷 𝐴 + 𝐷𝐵 = 𝐷𝑖 = 𝑀𝐶

 LINDAHL Equilibrium:
Equal quantity, different prices (perfect price discrimination).

𝐴 𝐵
𝑋𝑃𝑢 = 𝑋𝑃𝑢 = 𝑋𝑃𝑢

Private Good:

𝐴 𝐵 𝑖
𝑋𝑃𝑟 = 𝑥𝑃𝑟 + 𝑥𝑃𝑟 = 𝑥𝑃𝑟

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3.3 Private Provision
Problems in Achieving Efficiency

𝐷 𝐴 + 𝐷𝐵

𝐷𝐵

𝑀𝐶
𝐷𝐴

𝐴 𝐵 𝑥∗ 𝑥𝑃𝑢
𝑥𝑃𝑢 𝑥𝑃𝑢 𝑃𝑢

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3.4 Provision of Private Goods and Public Goods

𝑋𝑃𝑟 𝑋𝑃𝑟
𝑄 𝑄

𝑈3𝐴 𝐵
𝐴 𝑥𝑃𝑟
𝑥𝑃𝑟
𝑈2𝐴 𝑈3𝐵
𝑈1𝐴 𝑈2𝐵
𝑈1𝐵
𝑅 𝑋𝑝𝑢 𝑅 𝑋𝑃𝑢
𝑥𝑃𝑟 𝑥𝑃𝑟

𝑈3𝐴
𝐵
𝑥𝑃𝑟 𝑈3𝐵
𝑈2𝐴
𝑈2𝐵 𝐴
𝑥𝑃𝑟
𝑈1𝐵 𝑈1𝐴
(𝐴,𝐵) 𝑋𝑃𝑢 (𝐴,𝐵) 𝑋𝑃𝑢
𝑋𝑃𝑢 𝑋𝑃𝑢
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3.5 Club Goods
What is a „Club Good“?

 Examples:
 Golf club, Tennis club, etc.
 „Gated communities“

 Decisions on
 Optimal level of club infrastructure (capacity etc.)
 Optimal number of club member.

 Important: Both decisions are linked to each other.

 Buchanan, James M. (1965), An Economic Theory of Clubs, Economica 32 (125),

pp. 114.

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3.5 Club Goods
Optimal Size of a Club Good

Source: Buchanan (1965: p. 7).

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3.5 Club Goods
Optimal Size of a Club Good

Source: Buchanan (1965: p. 9).

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