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:
 Non-exclusion: The inability of a seller to prevent people from consuming a
good if they do not pay for it.
 Non-rivalry: The characteristic that if one person “consumes” a good,
another person’s pleasure is not diminished, nor is another person prevented
from consuming it.

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
 The marginal cost of providing a greater level of public good is positive.

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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.

 Price Excludable Public Goods (Excludability, but no rivalry)

Another type of good is a price-excludable public good: no rivalry but
exclusion is easy.
Examples: Country Clubs, Cable TV

 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

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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 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
Example: The following table shows how the marginal benefit of a service
varies for four consumers:

a. Suppose the service is a pure private good and is sold in a competitive market
with the only buyers being the four people whose marginal benefits are
shown in the table. If the market price of the product is $400, what is the
quantity demanded?
b. Suppose the service is a pure public good with the only consumers being the
four people whose marginal benefits are shown in the table. What is the
marginal social benefit of two units of the service?
c. If the marginal social cost of the good is $2,000, what is the efficient output
assuming that it is a pure private good?
d. If the marginal social cost of the good is $2,000, what is the efficient output
assuming it is a pure public good?

Answer:
a. 10 units
b. 2000
c. 0
d. 2

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Example: 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.

If the cost of security guards is $450 per week, then no individual will hire even
one guard, even though to group one is worth $750. The group should hire three.
If they 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).

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.
Freeriding is easier with
 Anonymity: If everyone knows who contributes, there can be powerful social
stigmas applied to shirkers.
 Large numbers of people: It’s 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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 Test your understanding
Multiple Choice Questions (MCQs):
1. A pure public good is:
a. one that can easily be sold by the unit.
b. one that is nonrival in consumption
c. one whose benefits are not subject to exclusion
d. both (b) and (c)
2. The marginal cost of providing a certain quantity of a pure public good to an
additional consumer after it is provided to any one consumer is:
a. zero.
b. positive and increasing
c. positive and decreasing
d. positive and constant
3. The nonrival property of pure public goods implies that the:
a. benefits enjoyed by existing consumers decline as more consumers enjoy a given
quantity of the good.
b. benefits enjoyed by existing consumers are unaffected as more consumers enjoy
a given quantity of the good.
c. good cannot be priced
d. marginal cost of producing the good is zero.
4. The demand curve for a pure public good is:
a. a horizontal line.
b. obtained by adding the quantities individual consumers would purchase at each
possible price.
c. obtained by adding the marginal benefit obtained by each consumer at each
possible quantity.
d. the marginal cost curve for the pure public good.
5. The free-rider problem:
a. becomes more serious as the number of persons involved in voluntarily financing
a pure public good decreases.
b. becomes more serious as the number of persons involved in voluntarily financing
a pure public good increases.
c. is independent of the number of persons involved in a scheme to voluntarily
finance a pure public good.
d. does not prevent voluntary cooperation from efficiently providing pure public
goods.

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6. Cable TV programming is an example of a:
a. congestible public good.
b. price-excludable public good.
c. pure public good
d. pure private good.
7. The principle of nonexclusion for pure public goods means that the benefits of the
good:
a. are shared
b. can be priced
c. cannot be withheld from consumers even if they refuse to pay
d. are not reduced to any one consumer when a given quantity is consumed by
another
8. Which of the following is a good example of a congestible public good?
a. TV programming
b. a road
c. a loaf of bread
d. homeland security
9. Public transportation is:
a. a congestible good.
b. a pure private good.
c. a good without limits to the number of consumers who desire to use it.
d. not subject to the exclusion principle
10. Education is:
a. a pure public good.
b. a pure private good.
c. a good that has characteristics of both public goods and private goods.
d. not subject to the exclusion principle.

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