Lecture04 Public Goods

CHAPTER FOUR
4 BEC 310: Public

Finance
Public Goods
In this chapter……
 Introduction
 Properties of Public Goods
 Public and Private Goods
 Efficient Provision of Public Goods
 Private Provision of Public Goods
 Clarke-Groves Mechanism
 The Ideal Lindahl Mechanism
1-2
Introduction
 One of the more implicit assumptions of the

first theorem of welfare economics is that all
individuals receive utility only from their own
consumption.
 The definition of a pure public good is that, once
it is provided, the additional resource cost of
another person consuming the good is zero.
1-3
Introduction
 We say ‚resource cost" (rather than just ‚cost")

to emphasise the fact that it is not important
whether additional users have to pay some
contribution to finance the provision of the
public good.
 Rather, what matters is that an additional user
does not cause any extra cost either for the
producer of the public good or for other users
of the public good by decreasing the service
quality of other consumers.
1-4
Introduction
 The public good is therefore called ‚non-rival‛

and ‚non-excludable‛ in consumption.
 Let us look at what we mean by the two terms
 Rivalry:
 A bad (good) is rival if one person’s consumption of a
unit of the bad (good) diminishes the amount of the
bad (good) available for others to consume.
 That is, there is a social opportunity benefit
(cost) to others associated with consumption.
 A bad (good) is non-rival otherwise.
1-5
Introduction
 Excludability:
 A good is excludable if it is feasible and practical to
selectively allow consumers to consume the good.
 A bad is excludable if it is feasible and practical to
selectively allow consumers to avoid consumption of
the bad.
 A bad (good) is non-excludable otherwise.
1-6
Introduction
 Some of the important examples of public

goods include:
 national defence
 radio broadcast
 street lighting
 scientific knowledge.
1-7
Introduction
 Note that there are some other types of goods

that are sometimes confused with public
goods.
 Publicly provided goods are goods that are
paid for by the state, not the individual
consumer. Any examples?
 Some publicly provided goods are typically
also produced by government employees, as in
the case of national security where soldiers are
employed by the state.
1-8
Introduction
 In this case, we say that the good is publicly

produced.
 In contrast, there are also goods that are
publicly provided, but not produced by
government employees, but rather by private
firms.
 An example are streets where the government
usually decides where to build a road, but uses
private sector firms to actually build the road.
1-9
Introduction
 On the other hand, there exist some public

goods that are not publicly provided, but for
which consumers have to pay a price.
 For example, once a motion picture is produced,
the additional resource cost of showing it to
another consumer are usually minimal so that a
motion picture is pretty near to a public good.
1 - 10
Introduction
 Nevertheless, movie tickets are expensive, and

successful movies recover their cost through
ticket sales, so that movies can be privately
provided.
 A similar example is computer software:
 Once the code is written, distributing it to an
additional user is essentially free.
 But very often, the copyright owner charges a
substantial price from those customers that
want to use his program.
1 - 11
Introduction
 The charges are to the extent that it prevents

users with a willingness to pay that is positive,
but smaller than the price, from buying, this
leads to a welfare loss that is the same as in the
monopoly.
 Finally, we should remark that the classification
of a good as a public good is not unchangeable.
 Rather, it depends on market conditions and
technology.
1 - 12
Introduction
 For example, a street during off-peak hours is

very close to a pure public good:
 The depreciation of the road due to an
additional user is very small, and an additional
user also does not inhibit other users in their
usage.
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Introduction
 However, the same street during rush hour

may be different.
 This is because another user who decides to
drive his car will prolong the time that other
drivers require to get to their destination.
 Hence, during rush hours, streets are not pure
public goods.
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Introduction
 We can now start with a determination of the

efficient supply of a public good, analysing
how the condition differs from the efficiency
conditions for private goods.
 We will then look at what happens when public
goods are provided by the public sector.
 We will show that, in equilibrium, a too small
quantity of the good is provided, compared to
the efficient quantity.
1 - 15
Introduction
 This provides a rationale for why many public

goods are provided by the government.
 Finally, we will deal with a problem that arises
when the government wants to determine
whether it is efficient or not to provide a particular
public good, but does not know people's
preferences.
 The Clarke-Groves mechanism provides a way
of eliciting this information.
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Market Failure: Public Goods
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Public Goods
 4.1 Properties of Public Goods

 Benefits from Private and Public Goods
 Private goods are therefore divided or
distributed among a population.
 Private goods, of course, are not necessarily
perfectly divisible; the baby in the judgment of
Solomon was not divisible.
 Divisibility of private goods is just an
approximation.
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Public Goods

 The characterising properties of private goods
are:
 that amounts available to individuals can differ
and
 what one person has, another person cannot
have.
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Public Goods
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Public Goods

 This indicates that:
 The quantity of a public good available to one
person is also the quantity available to everybody.
 Although the quantity is the same, in general,
people differ in their valuations of public
goods.
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Public Goods

 When a Mozart symphony is played, some
people will enjoy the music, whereas others
may find the music unappealing and may
prefer jazz or hard rock.
 The people who enjoy the Mozart symphony,
in principle, are prepared to pay to listen to the
music.
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Public Goods

 People who find the music unappealing should:
 be prepared to pay to have the music stopped or
 be allowed to leave, or
 they could request compensation if they have no
choice but to listen to the music.
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Public Goods

 The Transition from Private to Collective
Benefit
 When there is only one person, goods that
could potentially be public goods are private
goods.
 Refer to a story by Daniel Defoe, published in
1719, which tells of Robinson Crusoe living in
isolation on an island.
 This is in Hillman p.138.
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Public Goods

 The Transition from Private to Collective
Benefit
 In this story, Crusoe and the population that
has joined him face the normative questions:
 (1) How much of the different public goods
should be supplied?
 (2) How should the public goods be financed?
 Answers to these questions differ for pure and

congestible public goods.
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Public Goods

 Characteristics of Pure and Congestible Public
Goods
 Figure 4.1a shows the characteristics of a pure
public good.
 Individual benefits from a pure public good are
independent of the number of users.
 In figure 4.1a, individual benefit remains
unchanged as the number of users increases.
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Public Goods

Goods
Figure 4.1
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Public Goods
4.1b
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Public Goods

Goods
Figure 4.1b
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Public Goods
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Public Goods

Goods
 A person who pays other drivers to leave the
highway is privately financing a public good in
the form of reduced congestion for all other
drivers remaining on the highway.
 Congestible public goods can usually be
duplicated.
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Public Goods

Goods
 Whether duplicated or not, people can often be
excluded from congestible public goods at a
low cost.
 The possibility of exclusion allows markets to
be created in which people pay in order to
benefit.
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Public Goods

Goods
 Government, therefore, has no necessary
responsibility in the supply of congestible
public goods.
 Supply can be private, as in the case of gyms;
movie theatres; concerts; sports events;
transportation; private schools; private
hospitals; and toll roads, tunnels, and bridges.
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Public Goods

Goods
 Supply can also be competitive if there are
many private suppliers.
 Hence, in general, we can say that:
 Congestible public goods can be privately and
competitively supplied.
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Public Goods
4.1a.
4.1b
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Public Goods

Goods
 If public roads are congested or where there is
traffic congestion in an inner-city area,
governments can levy taxes to reduce
congestion.
 The taxes create incentives not to use a road or
not to enter an inner-city area.
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Public Goods

Goods
 Taxes, therefore, can have two distinct
purposes:
 (1) to reduce congestion, and
 (2) to provide revenue for the government.
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Public Goods

Goods
 More generally, we should know that:
 All pure public goods are natural monopolies.
 Because public goods are natural monopolies,
the question arises:
 Who will be the monopoly supplier?
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Public Goods

Goods
 Often, the monopoly supplier is the state or
government – for example, for law enforcement
and natural security.
 Publicly financed private security firms could
provide law-enforcement services.
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Public Goods

Goods
 The monopoly of government on legal coercion
would then be delegated to private persons,
who would be given control over restriction of
freedom of citizens.
 The private-profit motive of law enforcers could
result in citizens facing fabricated crimes and
infringements and confronting extortion when
threatened with arrest. 1 - 40
Public Goods

Goods
 Figure 4.2 shows how goods could be
categorised according to the degree of rivalry in
consumption and the degree of excludability.
 Let us classify goods according to the degree of
rivalry and excludability of benefits from their
use.
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Public Goods

Goods Figure 4.2
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Public Goods

Goods
 A pure public good corresponds to point B,
where there is no rivalry for benefits and
excludability from benefits is impossible.
 A pure private good corresponds to point A on
the graph.
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Public Goods

Goods
 A nonrival good, such as TV transmissions, for
which exclusion is possible, corresponds to a
point like C.
 A congestible public good for which it is
possible to charge for use, such as a limited
access highway, corresponds to a point like H.
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Public Goods

 Private Supply and Holdup Problems
 A government that is a monopolist for a public
good may also be a monopsonist in purchase of
inputs required to supply the public good.
 When there are no buyers other than the
government, a private supplier who has
produced, for example, defence equipment,
relies on the government to pay a pre-agreed
contractually specified price.
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Public Goods

 The private supplier then faces a potential
holdup problem;
 a holdup occurs if, after equipment has been
produced, a government reneges on the
contractually specified price and offers a lower
price.
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Public Goods

 A holdup can also occur in the opposite
direction;
 a private supplier can proclaim that unanticipated
cost overruns make adherence to the terms of the
original contract impossible and insist on a higher
than contractually specified price when supply is
necessary and
 other producers have not made the investments
that allow delivery of the equipment.
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Public Goods

 Mutual trust is therefore, necessary for private
supply.
 E.g. Defence equipment being privately
produced, by competing suppliers; outside of
the state, these would, in general be
government-owned monopolies, until in many
cases privatisation takes place.
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Public Goods

 Public Inputs
 Public goods are often inputs.
 Examples:
 Rule of law is a public input that allows productive
activity to take place and markets to exist;
 Defence equipment is an input into national security;
roads and bridges are public inputs into transportation.
 Conclusions about public goods, in general,
apply to public inputs.
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Public Goods

 Collective Harm
 Public goods and also public inputs can do
collective harm; damage to the environment
collectively harms everybody.
 We shall refer to public goods as encompassing
both collective benefit and collective harm.
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Public Goods

 Collective Harm
 A public good can also benefit some people and
disadvantage others, as in the case of music
that some people like and others do not.
 Unless otherwise indicated, we shall view
people as benefiting from public goods.
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Public Goods

 Public Goods and Altruism
 People who personally pay for public goods
seek benefit for themselves and also
inadvertently benefit others.
 When parents complain about an ineffective
teacher, the parents are motivated by benefit for
their own child but also provide a public-good
benefit for all other parents with children in the
class.
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Public Goods

 Public Goods and Altruism
 Payment for public goods contrasts with
altruistic behaviour in this way:
 The intent of payment for public goods is self-benefit,
whereas altruistic behaviour helps others without
personal benefit for oneself.
 Do it yourself: Is it possible to exclude people from
pure public goods? What happens if it is possible to
exclude them?
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Public Goods
 4.2 Efficient Provision of a Public Good

 Consider first an indivisible public good, i.e.,
the good is either provided completely or not.
 Think of a radio broadcast of some event.
 Suppose that there are two individuals in this
society, A and B.
 Assume that A's willingness to pay for the
public good is K20, and B's willingness to pay
is K10.
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Public Goods

 Clearly, we should provide the public good if
and only if the cost of producing the good is
smaller than A's and B's joint willingness to
pay for that good, i.e. K30.
 Note that this reasoning is very different from
the case of private goods.
 There, one unit should be provided to A if and
only if the cost of producing one unit is
smaller than K20.
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Public Goods

 Similarly, a unit should be provided to B if
and only if it is smaller than 10.
 For public goods, we can add the willingness
to pay of different individuals, because all
individuals here consume exactly the same
good.
 In the example here, they consume the same
radio broadcast.
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Public Goods
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Public Goods
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Public Goods
1 - 59
Public Goods
=0.
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Public Goods

 The cost of supply of a public good differs
from the cost of use.
 A bridge is costly to build but once the fixed
costs of building the bridge have been incurred
and the bridge exists, the cost of use of a non-
congested bridge is zero.
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Public Goods

 The efficient price of use of the bridge is
therefore zero.
 Efficient use requires that access to pure public
goods be free.
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Public Goods

 Consider now a continuous public good, that
is, a public good for which we can vary the
quantity or quality provided.
 In our broadcast example, think of the
technical quality of the broadcast, the quality
of the announcer etc.
 For continuous public goods, an argument
similar to the one given above suggests that
we can sum demand curves vertically.
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Public Goods
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Public Goods

4.3a
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Public Goods

Figure 4.3
1 - 66
Public Goods

 Figure 4.3b shows total demand for a public
good, defined either in terms of quantity or
quality.
 For a public good, the quantity or standard
available to one person is also that available to
everyone else.
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Public Goods

Figure 4.3
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Public Goods

 Therefore, collective (or total) demand for a
public good is found by asking:
 How much are all beneficiaries of a public good
willing to pay in total for a given common quantity
or standard?
 Private and public goods thus differ in the way
in which individual demands are summed to
obtain total demand.
 For private goods, the summation is horizontal; for public goods, the
summation is vertical.
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Public Goods

 Supply
 There is, in principle, no difference between
supply functions for private and public goods.
 As for private goods, the inputs required for
public goods are generally competitively
supplied in markets.
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Public Goods

4.4
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Public Goods

Figure 4.4
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Public Goods

4.4
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Public Goods
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Public Goods
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Public Goods
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Public Goods
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Public Goods
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Public Goods
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Public Goods
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Public Goods

 The first term on the left hand side is the
absolute value of the marginal rate of
substitution dx/dG of individual 1 between
public and private good.
 It tells us how many units of the private good
individual 1 is willing to give up for one more
unit of the public good.
 The second term on the left hand side is the
same expression for individual 2.
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Public Goods

 The optimality condition then says that the sum
of the marginal rates of substitution needs to be
equal to 1, which is the marginal cost of the public
good.
 Since we can consider the marginal rate of
substitution as a marginal willingness to pay,
in terms of the other good.
 This result has essentially the same interpretation
as the marginal benefit expression. 1 - 82
Public Goods

 Therefore, 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 i.e. MSB = MSC.
 But the marginal social benefit of any given
amount of a pure public good is the sum of the
individual marginal benefits received by all
consumers.
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Public Goods

 Recall from Figure 4.4 that the marginal social
benefit for a pure public good is the sum of the
individual marginal benefits.
 This gives the efficiency conditions for a pure
public good as:
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Public Goods

 The efficiency conditions for a pure public
good can also be written as
 This states the marginal social benefit of a unit

of a pure public good as the sum of the benefits
accruing to any one person acquiring it and of the
extra benefits that accrue to the remaining members
of the community.
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Public Goods

 Exclusion
 People cannot always exclude themselves from
pure public goods, nor is it always possible to
exclude people.
 For example, in the case of benefits from the
rule of law, competitive markets, and national
defence.
 However, where exclusion is possible, exclusion
from a pure public good is inefficient.
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Public Goods
 4.2 Private Provision of a Public Good

 Let us consider what happens if two players
decide individually with their own private
interest in mind whether and how much to
contribute to the public good.
 As the first simple example, consider the
following setup:
 All n players have two feasible actions, to
‚contribute" or ‚not to contribute".
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Public Goods

 If a player contributes, he has to pay K100, but
for every player, including the contributor
himself, there is a K80 benefit.
 If several players contribute, then each player
receives K80 times the number of contributors,
minus his cost (if applicable).
 Evidently, as long as there are at least two
players, it would be very beneficial if all
players ‚contribute".
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Public Goods

 However, the payoff structure of the game is
the same as in the Prisoners‘ Dilemma.
 It is a dominant strategy for each player not to
contribute.
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Public Goods
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Public Goods
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Public Goods

 For two players, we can capture the payoffs in
normal form for the public good game.
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Public Goods

 For two players, we can capture the payoffs in
normal form for the public good game.
 It is easy to check that (don't contribute, don't
contribute) is the unique equilibrium of this
game.
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Public Goods
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Public Goods

 We now want to see how we can apply the
concept of Nash equilibrium to this game of
public goods.
 Recall that a Nash equilibrium of a game is a
pair of actions (one for each player) that are
mutually best responses.
 That is, given the actions played by the other
players, no player could increase his payoff by
choosing a different action.
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Public Goods

 We want to answer this question,
 ‚What is the Nash equilibrium of the public
good provision game when both players decide
simultaneously how much to contribute?‛
 To do this, let us suppose that B does not
contribute anything, and analyse what the best
action for A is.
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Public Goods
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Public Goods
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Public Goods

 Given that B does not contribute anything, A’s
optimal contribution is 6 units.
 Let us also see this, given that A contributes 6
units, does B have an incentive to behave as
claimed and not contribute anything?
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Public Goods
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Public Goods
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Public Goods
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Public Goods
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Public Goods

 This is in fact the unique Nash equilibrium.
 To see this, note that there is never any level of
the public good such that both A's and B's
marginal gross benefit is equal to the marginal
cost, 4.
 But this would be a necessary condition for
both players to be willing to contribute positive
amounts.
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Public Goods

 In the Nash equilibrium, the player with the
higher marginal benefit pays everything, the
other player just benefits and pays nothing.
 The prospect of benefit without personally
paying underlies an incentive to “free-ride” by
letting others pay.
 If no one pays in anticipation that others will
pay, there is no supply of a public good.
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Public Goods

 We can anticipate that because of the incentive
to free-ride on payments of others, voluntary
payments in competitive markets fail to result
in efficient supply of public goods.
 Public goods are therefore a source of ‚market
failure.‛
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Public Goods

 Note also that the public good is under-provided,
in the sense that the equilibrium quantity of the
public good is smaller than the efficient
quantity.
 If the public good provision problem is
sufficiently important, private parties should
usually be able to agree to contracts with each
other that lead to a better equilibrium than the
pure private provision equilibrium.
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Public Goods

 The most convincing application of the model
of private provision of public goods is
probably the issue of international cooperation.
 This is because countries have a harder time
committing to an enforceable contract, as there
are no courts that can really force nations to
abide by a contract that they really want to
break.
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Public Goods

 Of course, there are some international courts
whose judgments are binding for member
states.
 However, in contrast to national courts dealing
with their citizens, these international courts
ultimately have to rely on the losing party to
abide by their judgment.
 They do not have any enforcement mechanism like a police
to actually force the losing party to do what the court
ordered.
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Public Goods

 One issue in which public good provision is
important is common defence within an
alliance of nations.
 For example, during the cold war, NATO
members were constantly quarrelling over the
size of their respective defence budgets.
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Public Goods

 There was an agreement that member states
should spend at least 3 percent of their GDP for
defence, but in practice very few countries
reached this target.
 The U.S. did (as they apparently had the
highest marginal benefit), but many, in
particular of the smaller European countries
spent far less.
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Public Goods

 Luxemburg, for example, did not have an army
at all, just as the free-riding behaviour in the
public goods game predicts.
 This is perfectly rational as the additional
contribution that Luxemburg could have made
would have been unlikely to make much of a
difference in case of a war.
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Public Goods

 Of course, the point is not that Luxemburg did
not provide a large army.
 It is a small country, less than 1 percent the size
of Germany; yet, if they had had an army
proportional to the German army during the
cold war, this would have been several
thousand soldiers.
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Public Goods

 Another issue in which nations currently have
to decide how much to contribute to the public
good is the question of climate gas reductions.
 Global warming depends on the total amount
of carbon dioxide in the atmosphere, and thus
pollution abatement is a worldwide public
good.
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Public Goods

 However, each country alone has to be aware
that unilateral reductions by it alone do not
change global warming all that much.
 A non-cooperative equilibrium is therefore,
likely not to have very much pollution
reduction at all.
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Public Goods
 4.3 Public Provision of a Public Good

 We have showed that private provision results
in under provision of the public good.
 We need to find out if it is possible for the
government to come up with rules that secure
efficient provision of the public good.
 A straightforward approach to get the relevant
information is to ask the households to reveal
her valuation of the public good.
 Let us discuss two mechanisms that might help.
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Public Goods
 4.3.1 Clarke-Groves Mechanism

 We have seen that the amount of a public good
that is provided through private voluntary
contributions is likely to be too low from a
social point of view.
 Under-supply of voluntarily financed public goods
arises because of freeriding incentives.
 If the state knows the marginal benefit
functions of people, it can intervene and just
provide the efficient quantity of public goods.
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Public Goods

 However, in practice, we face the following
problem:
 How could the state find out how much of the
public good to supply, if individual demand
functions are unobservable for outsiders?
 Of course, all people know their own utility.
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Public Goods

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Public Goods

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Public Goods

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Public Goods

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Public Goods

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Public Goods

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Public Goods

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Public Goods
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Public Goods

 If the public good is provided even after A's
small lie, then the only effect of the lie is that it
reduces A's payment.
 This is a sizable effect (the second term).
 There is also some chance that the public good
would have been provided if A had told the
truth about his valuation, but is not provided if
A lies.
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Public Goods
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Public Goods
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Public Goods
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Public Goods
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Public Goods

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Public Goods
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Public Goods
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Public Goods
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Public Goods
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Public Goods

 Note also that it does not matter for A whether
B reveals his type truthfully or lies, so
whatever B does, A's optimal action is to reveal
his true type.
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Public Goods

 Of course, a symmetric argument implies that
also B will reveal his true type in the Clarke-
Groves mechanism.
 Since both players announce the truth, and the
public good is provided if and only if this is
efficient if the announcements are truthful, the
efficient solution can be implemented with the
Clarke-Groves mechanism.
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Public Goods
1 - 139
Public Goods
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Public Goods
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Public Goods
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Public Goods

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Public Goods

 The government could charge from both people
an additional lump sum payment (i.e., the same
amount, whether or not the good is provided)
to offset this.
 However, it is not possible to construct a
mechanism that gives incentives for truthful
revelation and has a balanced budget for all
possible realisations of the types.
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Public Goods
 4.3.2 The Ideal Lindahl Mechanism

 The ideal efficient outcome for voluntarily
financed public goods is known as the Lindahl
solution, achieved through the Lindahl (1919)
mechanism.
 In the Lindahl solution, people are described as
paying a share of the cost of public goods
according to their true preferences.
 Therefore, no one free rides.
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Public Goods

 The Lindahl solution emphasises the need for
consensus on the quantity or standard of a
public good.
 Consensus is important.
 Ideally, people should not be compelled to pay for a
quantity or standard of a public good that they do
not want; therefore, it is desirable that there be
consensus about the quantity or standard.
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Public Goods
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Public Goods

 In figure 4.5, the horizontal axis measures the
common quantity of a public good.
 No one is excluded from benefit so there is an
efficient price of use of zero.
 Still, there is a need to pay for the public good.
 The Lindahl solution determines the efficient
quantity (or standard) available to everyone and
efficient sharing of payment by beneficiaries of
the public good.
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Public Goods

Figure 4.5
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Public Goods

4.5
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Public Goods
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Public Goods
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Public Goods
4.6
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Public Goods

Figure 4.6
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Public Goods
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Public Goods

 Figure 4.6 can be interpreted in terms of
demand and supply.
 Demand of one person is supply for the other.
 Because a public good provides collective benefit
no matter who pays, payment by one person for
the public good is free supply for the other.
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Public Goods

4.6
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Public Goods
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Public Goods
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Public Goods
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Public Goods

 Thus:
 The Lindahl voluntary-payment consensus results in
efficient supply of public goods through voluntary
personal payments.
 There is something that we have to be aware of

regarding the Lindahl equilibrium which we
discuss in a bit of detail next.
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Public Goods

 However, the efficient Lindahl solution
requires people to be truthful about their
benefits expressed in willingness to pay for
public goods.
 In figure 4.7, understatement of personal
benefit by person 1 changes the determination
of personal cost shares from point E to point E’.
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Public Goods

Figure 4.7
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Public Goods
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Public Goods

 The mutual incentives to understate true
benefit once more result in inefficient under-
supply of the public good.
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Public Goods

 The Lindahl solution as a benchmark
 The Lindahl solution is a normative portrayal of
ideal truthful behaviour of beneficiaries of
public goods.
 People are thus viewed as trusting and
trustworthy.
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Public Goods

 The Lindahl solution is, however, contrary to
the premise that people maximise utility.
 Or do people do the best for themselves because
misrepresenting their preferences when others
do not, people can reduce their personal cost
shares.
 We shall not propose that the Lindahl solution
is feasible.
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Public Goods

 Because of asymmetric information regarding
personal benefits (only individuals themselves
know their own benefits), we would indeed
never know if the Lindahl solution had been
achieved.
 We can nonetheless use the Lindahl solution as
a benchmark for efficient payment and supply
of public goods.
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Public Goods

 Our question is whether there is some way of
achieving the efficient Lindahl consensus
outcome.
 In particular, can governments replicate the
efficient Lindahl consensus outcome?
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Public Goods

 Key takeaways
 Since individuals have an incentive to
underreport the Lindahl mechanism is not
efficient.
 If the government is to provide the public goods
efficiently, it needs to have information on
preferences/valuations/demands.
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Public Goods

 Key takeaways
 If that information is privately held, then the
government must setup an incentive system
that induces individuals to reveal preferences,
valuations, and demands.
 The goal of mechanism design is to determine
how individual preferences can be elicited and
aggregated into desirable social or collective
decisions.
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Public Goods

 Key takeaways
 Food for thought: Do rules for the provision and
financing of public goods that lead individuals to
report true information and allow the government to
implement efficient allocations exist?
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Public Goods

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Public Goods
 Do it yourself:
 Try Prisoners’ dilemma on strategic behaviour.
 Read ‚Economics students and cooperation‛ in
Hillman, p.157.
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Public Goods
 Must read papers:

 The classic paper on the efficient provision of public goods is:
 Samuelson, P.A. (1954) ‛The pure theory of public expenditure‛, Review
of Economics and Statistics, 36, 387 - 389.
 The private provision model is developed fully in:
 Bergstrom, T.C., L. Blume and H. Varian (1986) ‛On the private
provision of public goods‛, Journal of Public Economics, 29, 25 - 49.
 Itaya, J.-I., D. de Meza and G.D. Myles (2002) ‛Income distribution,
taxation and the private provision of public goods‛, Journal of Public
Economic Theory, 4, 273 — 297.
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Public Goods
 Mechanism design for public goods was first described in:

 Groves, T. and J. Ledyard (1977) ‚Optimal allocation of public goods: a
 solution to the ‚free rider‚ problem‚, Econometrica, 45, 783 - 809.
 The sequential private provision is based on:
 Admati, A.R. and M. Perry (1991) ‛Joint projects without commitment‛,
 Review of Economic Studies, 58, 259 - 276.
 Experimental results are surveyed in:
 Bohm, P. (1972) ‚Estimating demand for public goods: an experiment‚,
 European Economic Review, 3, 55 - 66.
 Isaac, R.M., K.F. McCue and C.R. Plott (1985) ‛Public goods in an
experimental environment‛, Journal of Public Economics, 26, 51 - 74.
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END
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CHAPTER FOUR

4 BEC 310: Public

 One of the more implicit assumptions of the

 We say ‚resource cost" (rather than just ‚cost")

 The public good is therefore called ‚non-rival‛

 Some of the important examples of public

 Note that there are some other types of goods

 In this case, we say that the good is publicly

 On the other hand, there exist some public

 Nevertheless, movie tickets are expensive, and

 The charges are to the extent that it prevents

 For example, a street during off-peak hours is

 However, the same street during rush hour

 We can now start with a determination of the

 This provides a rationale for why many public

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 Answers to these questions differ for pure and

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.1 Properties of Public Goods

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good

 4.2 Efficient Provision of a Public Good