CHAPTER 4 PUBLIC GOODS PUBLIC PROVISION OF GOODS

CHAPTER 4: PUBLIC GOODS

PUBLIC PROVISION OF GOODS Private provision of certain goods (particularly those that are nonexcludable and non-rival in consumption) may fail to produce the efficient level of the good/service because of the incentives to undercontribute or “free ride”. Why would a person voluntarily contribute to the provision of a public good when he/she can enjoy the benefits without such contribution? Conventional economic models suggests: __________ More recently, experimental studies show that contributions are often positive, and not zero. � However, an under-provision of the good still results. � Experimental studies find: �

PROBLEMS: EFFICIENT PROVISION OF PUBLIC GOODS 1. o How does a government collect demand information on a good/service in cases where no private market exists (such as national defense) to know how much of the service is optimal? o perhaps demand information could be elicited from citizens via survey instruments? o Would consumers accurately supply such information? 2. o How much, in monetary terms, do you value national defense?

PROBLEMS CONTINUED 3. _________________ If efficient provision of public goods depends on supplying a good such that MRSa + MRSb = MRT then consumers must reveal their true WTP or preferences to arrive at the optimal provision level. � Note: this is not a problem with private goods since you either pay the market price and receive the good and/or gain access to a service; or you fail to pay and do not receive the good/service (since private goods are excludable). � With public goods there is an incentive to:

PROBLEMS CONTINUED 4. � requires adoption of some social welfare function � This area of economics is referred to as “political economy” or how the government go about making decisions about the appropriate level of provision. 5. ________________: If true preferences could be identified, and appropriate contributions determined then the government would need some way of forcing contributions (typically taxes). � In general, taxation distorts prices and therefore economic incentives and behavior. They typical result in some degree of efficiency loss. Therefore, a “ first best solution” is not practical. � Taxation will be discussed in the 3 rd section of the course.

REAL WORLD EXAMPLES—PUBLIC GOODS o Public broadcasts, such as radio stations, are public goods by nature. They are non-rival and non-excludable and therefore face problems with insufficient contributions to fund the optimal level of programming. o WNYC, New York City radio station, estimates that they have 1 million listeners and only 75, 000 contribute each year (7. 5% of listeners). o o Contributions account for 35% of operating budget. Obvious free riding occurs here! To avoid this same problem the BBC (national TV station in UK) charges a $200 annual licensing fee to anyone who owns and operates a TV. � Enforcement? They maintain a database of addresses recorded when TV purchases are made and use TV detection devices to sense if a TV is being used. If no license, fee of up to $1, 500!

“FREE-RIDING” LITERALLY 1994, the town of Cambridge tried to provide a green alternative to the dirtier forms of transit—cars, buses, and trains. Cambridge spent $20, 000 on 350 green bicycles scattered throughout the city. � Anyone could use the bicycle free of charge throughout the day, reducing reliance on other modes of transportation (non-excludable). � Users were expected to return bikes to one of 15 stands after use at the end of the day. � Within 4 days, not a single bicycle could be found. Presumably the bikes were taken, painted another color, and used privately or sold for cash. The green experiment failed! � Why? Because the “good” in question had intrinsic value that could be captured by an individual. The good was not truly “ public” in nature and “entrepreneurs” recognized the opportunity to maximize their private wealth and didn’t care about social welfare. Literally “free riders!”

UNDER WHAT CONDITIONS IS THE PRIVATE PROVISION OF A PUBLIC GOOD CLOSE TO THE EFFICIENT LEVEL? 1. Ex: a driveway shared by two homes—a mansion and a shack. If one removes snow from driveway then both get the benefits (non-excludable). The mansion owner, with more money, may care enough to pay for the entire cost to have a clean driveway. 2. � contributing to the public good because it enhances your welfare and the welfare of others; not simply maximizing your personal utility. � Contributions are typically higher when: _____________

CONDITIONS CONTINUED 3. o This can be as simple as you feeling a psychological benefit from doing the right thing o Often associated with public acknowledgment of your contribution. o For example, we observe higher contributions when a plaque with names of supporters is displayed.

THE PRIVATIZATION DEBATE Are there situations in which public goods are provided successfully by the private sector? � Yes, such examples include: Such examples provide evidence that government intervention is not always the solution giving weight to privatization:

PRIVATIZATION EXAMPLES 1. Our court system has a private counterpart— 2. ____________________: Ex: many BIDs occur in urban areas where sanitation (garbage collection, street sweeping, etc) are provided by the local government. However, due to budget constraints services are not provided at a sufficient level. The business owners pay a private firm to provide these services. They often result in ________________(as merchants move out of downtown areas and out to suburbs; BIDs address issues of crime, safety, cleanliness of these areas to attract retail back)

BIDS CONTINUED o One of the first examples was NYC—Times Square. Local government tried for years to keep area clean and crime free to no avail. In 1992, a BID was formed hiring own sanitation workers, private security, etc. In theory, BIDs should fail due to: Many local communities, in an effort to minimize the free rider problem_________________________ example, in NYC if 60% of the merchants voluntarily participate in BID, then taxes can be levied on all merchants in the BID area to force contributions. � In the case of Times Square, 84% voluntarily contributed resulting in a BID with a budget of over $5 million and 120 employees.

PRIVATIZATION EXAMPLES CONTINUED 3. From text: Hurricane Katrina destroyed a government owned (car) bridge and a privately owned train bridge. � with six months, the privately owned train bridge was fully reconstructed and open for business. � within sixteen months, the government bridge was still under construction (only basic pilings –support structure —was completed).