08.11.2023 Public Goods#

Types of Goods

Excludable

Non-excludable

rival

private good

club good

non-rival

common good

public good

Example: atmosphere as a sink for emissions

Optimal Provision#

How much should the society provide?

  • Aggregate demands (here two individuals)

  • add Demands at each point (vertically)

Mathematically: Ben and Jerrys Demand

\[ MRS_{m,c}^B + MRS_{m,c}^J = MC \]

Visual:

Addition

Market

img

img

Private Provision#

Problem: Underprovision due to Free Rider Problem = Market Failure

Possible Situations_

  • some care more than others

  • people are altruistic

  • people have warm glow from others (like seeing other people happy)

Solution:

  • overcome non-excludability

  • charge user the fees

=> often does not work!

Public Provision#

Problems here:

Crowd Out#

  • empirically not high

  • in laboratory very high

=> not sure about this, but definitely less than full!!

Provision Mechanism#

possible Solution: Contracting out

  • misaligned incentives

  • risk of corruption, not always best offer

=> do it yourself

Measuring Costs / Benefits#

Problems:

  • benefits not defined

  • opportunity cost of production

=> Cost Benefit Analysis

Measuring Preferences#

Problems

  • Preference revelation: people dont want to say their true value because they fear being charged

  • preference knowledge: not knowing what value is to you

  • preference aggregation: how to combine

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