Chapter7PublicGoods.pptVIP

Chapter 7Public Goods Jonathan Gruber Public Finance and Public Policy Introduction Some markets do not work very well because the good in question has public good characteristics to it. For example, in Dhaka, Bangladesh, public trash collection is fairly inefficient, but attempts at privatization have not fared any better. The key problem with private collection of garbage is the free rider problem–with a private, voluntary system, each resident could simply sneak his garbage into his neighbor’s garbage and avoid making payments. Introduction Eventually, everyone would figure this out, and no one would be willing to pay trash collection voluntarily. In fact, most residents have figured out the incentive to “free ride.” Only 50 of 1,100 neighborhoods have private garbage collection, however. Introduction This lesson explores the role of government in providing goods like this, and shows that the private sector tends to underprovide them. It also explores the notion of “crowd-out” where public provision simply substitutes for already existing private provision of a good. Introduction The role of public goods is important in economics. The subsequent lessons explore issues related to: Cost-benefit analysis Political economy State and local government Education OPTIMAL PROVISION OF PUBLIC GOODS Pure public goods have two traits: They are non-rival in consumption: The marginal cost of another person consuming the good is zero, and does not affect your opportunity to consume the good. They are non-excludable: There is no way to deny someone the opportunity to consume the good. Table 1 gives some examples. OPTIMAL PROVISION OF PUBLIC GOODS It is helpful to think of public goods as goods with a large, positive externality. Optimal Provision of Private Goods Consider a private good, like ice cream. Figure 1 shows the market for ice cream cones, assuming that the alternative use of the money is buying cookies at $1 each. This makes cookies the numeraire good. Optimal Prov