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Public Goods
Public Goods -- Definition
Suppose rA c and rB c .
Then A would supply the good even
if B made no contribution.
B then enjoys the good for free; free-
riding.
Private Provision of a Public Good?
Suppose rA c and rB c .
Then neither A nor B will supply the
good alone.
Private Provision of a Public Good?
Suppose rA c and rB c .
Then neither A nor B will supply the
good alone.
Yet, if rA rB c also, then it is Pareto-
improving for the good to be supplied.
Private Provision of a Public Good?
Suppose rA c and rB c .
Then neither A nor B will supply the
good alone.
Yet, if rA rB c also, then it is Pareto-
improving for the good to be supplied.
A and B may try to free-ride on each
other, causing no good to be supplied.
Free-Riding
MUB
MUA
G
Efficient Public Good Supply -- the
Quasilinear Preferences Case
pG
MUA+MUB
MUB
MUA
G
Efficient Public Good Supply -- the
Quasilinear Preferences Case
pG
MUA+MUB
MUB MC(G)
MUA
G
Efficient Public Good Supply -- the
Quasilinear Preferences Case
pG
MUA+MUB
MUB MC(G)
MUA
G* G
Efficient Public Good Supply -- the
Quasilinear Preferences Case
pG
MUA+MUB
MUB MC(G)
pG*
MUA
G* G
Efficient Public Good Supply -- the
Quasilinear Preferences Case
pG *
pG MU A (G*) MUB (G*)
MUA+MUB
MUB MC(G)
pG*
MUA
G* G
Efficient Public Good Supply -- the
Quasilinear Preferences Case
pG *
pG MU A (G*) MUB (G*)
MUA+MUB
MUB MC(G)
pG*
MUA
G* G
Efficient public good supply requires A & B
to state truthfully their marginal valuations.
Free-Riding Revisited
subject to x B gB w B , gB 0.
Free-Riding Revisited
gA
xB
Free-Riding Revisited
xB
Free-Riding Revisited
xB
Free-Riding Revisited
xB
Free-Riding Revisited
xB
Demand Revelation
N individuals; i = 1,…,N.
All have quasi-linear preferences.
vi is individual i’s true (private)
valuation of the public good.
Individual i must provide c i private
good units if the public good is
supplied.
Demand Revelation
N N
or ni 0 and ni n j 0
i j i j
N N
If ni 0, then ni 0 is the loss.
i j i j
Demand Revelation