Lecture 8: Public Goods - Harvard University
Lecture 8: Public Goods
Stefanie Stantcheva Fall 2017
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PUBLIC GOODS: DEFINITIONS
Pure public goods: Goods that are perfectly non-rival in consumption and are non-excludable Non-rival in consumption
: One individual's consumption of a good does not affect another's opportunity to consume the good. Non-excludable: Individuals cannot deny each other the opportunity to consume a good. Impure public goods: Goods that satisfy the two public good conditions (non-rival in consumption and non-excludable) to some extent, but not fully.
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7.1
CHAPTER 7 PUBLIC GOODS
Defining Pure and Impure Public Goods
Is the good rival in consumption?
Yes
No
Yes Private good
Is the good
(ice cream)
excludable? No Impure public good
(crowded sidewalk)
Impure public good (Cable TV)
Public good (defense)
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright ? 2012 Worth Publishers
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OPTIMAL PROVISION OF PRIVATE GOODS
Two goods: ic (ice-cream) and c (cookies) with prices Pic , Pc
Pc = 1 is normalized to one (num?raire good):
BJ Two individuals and demand different quantities of the good at the same market price.
MRSic c
,
=
MUic /MUc
=
#
cookies
the
consumer
is
willing
to
give
up
for
1
ice-cream
The optimality condition for the consumption of private goods is written as:
MRSiBc c = MRSiJc c = Pic /Pc = Pic
,
,
Equilibrium on the supply side requires: MCic = Pic
In equilibrium, therefore: MRSiBc,c = MRSiJc,c = MC
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7.1
CHAPTER 7 PUBLIC GOODS
Horizontal Summation in the Private Goods Market
Price of ice cream cone
Ben's Marginal Benefit
Jerry's Marginal Benefit
Price of ice cream cone
Price of ice cream cone
Market
S = SMC
$2
DB
$2
DJ
$2
E
DB&J = SMB
0
2 Quantity
01
Quantity
0
of cones
of cones
3 Quantity of cones
? To find social demand curve, add quantity at each price--sum horizontally.
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright ? 2012 Worth Publishers
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