Chapter 4 – Public Goods

What characteristics do public goods have?

 Provide benefits that cannot be withheld from those who do not pay
 Shared by large groups of consumers
 Usually made available politically through voting on how much supply
 Are non-rival in consumption
 A given quantity can be enjoyed by many consumers without decreasing amounts enjoyed by rival
consumers
 Are nonexclusive
 It is too costly to exclude those who refuse to pay from enjoying the benefits

What are pure public goods?

- Pure public good- nonrival in consumption for an entire population of consumers
o Non-exclusive
o Results in widely consumed external benefits
o Not divisible into units that can be apportioned

What is a pure private good?

-provides benefits only to the person who acquires the good, not anyone else
o Rival in consumption
o Results in neither positive or negative externalities

What are congestible public goods?

Goods for which crowding or congestion reduces the benefits to existing consumers when more
consumers are accommodated

For example, a user of a congested road decreases the benefits to existing users by slowing traffic and
increasing accident risk

What are price excludable public goods?

 Goods with benefits that can be priced
 Schools, hospitals
 Can be individually consumed
 Are subject to exclusion
 Their production and consumption is likely to generate externalities

What is the Lindahl equilibrium?

 States that the voluntary contribution per unit of the public good of each member of the
community equals his or her marginal benefit of the public good at the efficient level of output
 Equilibrium contributions per unit of the public good sometimes called Lindahl prices
 Lindahl equilibrium could be achieved by assigning each participant a Lindahl price per unit of
the public good

What is a free rider?

 A person who seeks to enjoy the benefits of a public good without contributing anything to the
cost of financing the amount made available
 This strategy almost guarantees that the equilibrium amount of a pure public good will be less
than the efficient amount
 Problems become more acute in large groups, where a free rider reasons that their contribution
is less likely to be needed or missed
Marginal Costs for Provision of Public Goods:
 The marginal cost of allowing another person to benefit from a pure public good is zero while the
marginal cost of a greater level of public good is positive

Figure 4.1A shows that the marginal cost of allowing additional people to consume certain amounts of a pure
public good falls to zero after the good has been made available for any one person. (Be careful not to
confuse distribution cost with production cost.) The marginal costs of accommodating an additional
consumer will be zero for a given quantity of a pure public good. However, the marginal cost of producing
additional units of the public good will be positive, as is the case for all economic goods, because increasing
the quantity of a pure public good requires additional resources. This is illustrated in Figure 4.1B, where we
assume that the average cost of a pure public good is constant. Two units of the public good cost twice as
much as one unit. In this case, if the average cost of the public good is $200 per unit, the marginal cost will
also be $200.

Congestible public goods

The marginal cost of allowing additional users to

consume the congestible public good falls to zero after
the good is made available to any one user but then
rises above zero after N* users are accommodated per
hour.

Demand for PRIVATE GOODS

The market demand curve for a pure
private good gives the sum of the
quantities demanded by all consumers at
each possible price per unit of the good.
The market demand curve for a pure
private good, such as bread, is illustrated
in Figure 4.4. The demand for a private
good is obtained by adding the quantities
demanded by each consumer at each
possible price. The efficient output is six
units per week, which corresponds to
point E. At a price of $3 per loaf,
MBA = MBB = MBC = MC.
 Demand for a Pure Public Good

The demand curve for a pure public good is obtained by

summing the individual marginal benefits at each quantity

For a pure public good, all consumers must consume the

same quantity of the good. Purchasers of a pure public
good would not be able to adjust their consumption
so that one person had one unit per week, while another
person enjoyed two units per week, and still another had
three units per week. If consumer A had three units per
week, all other people would consume three units per
week. For a pure public good, consumers cannot adjust
the amounts purchased until the price of the good equals
their marginal benefit from the good per week. In fact, a
pure public good cannot be priced because of its non-
exclusion property

The efficient quantity per time period of a pure public good corresponds to the point at which output is
increased so that the sum of the marginal benefits of consumers equals the marginal social cost of the good. The
efficiency conditions for a pure public good are:
1. Bread is an example of a good that is nonrival in consumption. (F)

2. A pure public good is one for which it is easy to exclude consumers from benefits if they refuse to
pay. (F)

3. The marginal social cost of producing another unit of a pure public good will always be positive. (T)

4. To obtain a demand curve for a pure public good, the marginal benefit of each consumer must be
summed for each possible quantity produced per time period. (T)

5. If the efficient amount of a pure public good is produced, each person consumes it up to the point at
which his or her marginal benefit equals the marginal social cost of the good. (F)

6. In a Lindahl equilibrium, each consumer of a pure public good consumes the same quantity and pays a
tax share per unit of the good equal to his or her marginal benefit. (T)

7. If the marginal social cost of a pure public good exceeds its marginal social benefit, additional units of
the good can still be financed by voluntary contributions. (F)

8. The free- rider problem is less acute in small groups than it is in large groups. (T)

9. A congestible public good is one for which the marginal cost of allowing an additional consumer to
enjoy the benefits of a given quantity is always zero. (F)

10. Television programming is a good example of a price-excludable public good. (T)

11. It is possible to price a pure public good and sell it by the unit. (F)

12. The demand curve for a pure public good is obtained by adding the quantities demanded by each
individual consumer at each possible price. (F)

13. A Lindahl equilibrium usually has each participant paying the same tax share per unit of a public good
even though their marginal benefit of that unit varies. (F)

14. Internet service is an example of a price-excludable public good. (T)

15. Clubs are a means of providing congestible public goods through markets. (T)
MULTIPLE CHOICE QUESTIONS
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 quan-
tity 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 efficient output of a pure public good is achieved at the point at which:
a. the marginal benefit obtained by each consumer equals the marginal social cost of producing
the good.
b. the sum of the marginal benefits of all consumers equals the marginal social cost of producing
the good.
c. the marginal benefit of each consumer equals zero.
d. the marginal social cost of producing the good is zero.
e. both (c) and (d)

6. The monthly rental rate for a satellite dish antenna is $200. The maximum marginal benefit that
any resident of a condominium community will obtain per month from the antenna is $50. There
are 100 residents in the community, none of whom values the antenna at less than $25 per month.
Assuming that the antenna is a pure public good for residents of the community,
a. each resident of the community will rent his own antenna.
b. it is inefficient for the community to rent an antenna.
c. it is efficient for the members of the community to rent an antenna for their common use.
d. it is efficient for each resident to rent his own antenna.

7. In a Lindahl equilibrium,
a. each consumer purchases a pure public good up to the point at which his or her marginal bene-
fit equals the marginal social cost of the good.
b. each person pays a tax per unit of the pure public good equal to his or her marginal benefit.
c. the sum of the marginal benefits of all consumers equals the marginal social cost of the good.
d. both (a) and (c)
e. both (b) and (c)

8. 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.

9. The marginal cost of making a given quantity of a congestible public good available to more con-
sumers is:
a. always zero.
b. positive and increasing.
c. positive and decreasing.
d. zero at first but eventually becomes positive and increasing.

10. 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.
11. A major distinction between pure public goods and pure private goods is that:
a. pure private goods can easily be priced and sold in markets.
b. pure public goods can easily be divided into units.
c. pure public goods can only be collectively consumed.
d. both (a) and (c)

12. 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.

13. Which of the following is true in a Lindahl equilibrium for cooperative supply of a pure public
good?
a. The sum of the tax shares per unit paid by each consumer is equal to the marginal social cost of
the public good.
b. The sum of the tax shares per unit paid by each consumer is equal to the marginal social benefit
of the good.
c. The sum of the tax shares per unit paid by each consumer is maximized.
d. both (a) and (b)

14. 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

15. 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.