L 24 Public Goods Public Goods Definition u
L 24 Public Goods
Public Goods -- Definition u Some goods are: – Nonexcludable (NE): property rights cannot be enforced. – Nonrival (NR): all consumers can simultaneously consume the good. E NE R NR u. A good is public if it is NE and NR
Examples of public goods u National defense u Mathematical formula (Research) u Broadcast radio and TV programs u National parks
Park Size: Market Outcome u Two agents: A and B u Pubic good: Park u A: Regular consumer u B: Park lover
Plan for today u 1. Free Markets (Nash Equilibrium) u 2. Socially optimal outcome u 3. Implementation
A: best response to
A: best response to
B: best response
Equilibrium u Nash - Equilibrium: best response to
Free riding by A u In Nash Equilibrium: B: Creates a park of size 4 A: Does not contribute at all and uses the park created by B u Free riding by A u Size of the park (General rule)
Free Market Supply
Pareto efficient outcome u Mayor maximizes welfare of both A and B
Underprovision of public u Efficient size of Park: 6 u Underprovision of public good u Public good: positive externality u (Pareto) optimal size (General Rule)
Socially optimal supply
Implementation of efficient outcome u How to implement efficient outcome? u Tax agents and provide Public Good u Problem: Information about valuation u Mechanism design: How to extract information in the least costly way
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