Lecture 3 - Public goods Flashcards
Non-excludability - definition
Not possible, or only at an excessive cost, to prevent others from consuming the good once provided i.e. non-excludable only if costs of doing so outweigh benefits
Non-rivalry - definition
One’s consumption has zero opportunity cost, does not reduce the amount others can consume.
-> matter of degree: many goods are non-rival up to a point where additional people impose congestion costs (e.g. art galleries)
Experimental evidence on free-riding
Most studies find that participants make greater contributions to the public good than theory suggests.
-> altruism, norms and other non-economic motivations limit the extent of free-riding
Volunteer-type public goods - definition and result
Public good provided if one person contributes, e.g. who will pick up the rock from the road
-> social optima are asymmetrical outcomes (e.g. one of the two contributes, only)
Weakest-link-type public goods - definition, example and result
Provided at a level equal to the lowest individual contribution (eg. flood defence on island)
-> no free rider problem but coordination needed to get to the best outcome
Efficient provision of public goods - condition and result
Samuelson Condtion: ∑MRS = MRT , as each additional unit of public good benefits each person
-> incentive to misrepresent preferences, either understating to avoid taxes and free-ride or overstating if it isn’t expected to influence taxes paid
Demand curves for public and private goods
Public goods: added vertically to show total WTP for a given amount of public good
Private goods: added horizontally to show total quantity wanted at a given price
Lindahl procedure - definition, equilibrium, 2 results
Tax shares paid by individuals increase with their demand (<=> personalised prices).
An equilibrium is a set of ‘Lindahl prices’ such that everyone demands the same amount of the public good.
-> satisfies the Samuelson condition
-> but strong incentive to lie so as to pay less taxes while getting nearly the same amount of the public good
Bohm’s experiment - result
No significant difference in WTPs for different payment schemes, some of which were expected to have downward (/upward) biased answers.
2 incentive compatible mechanisms
1) Vickrey / Second Price auction -> truthful bidding is weakly dominant
2) Clarke-Groves demand-revealing process -> no incentive to lie
Properties of the Clarke-Groves mechanism (3)
1) Voter only pays when decisive
2) Tax never exceeds benefits received (only the amount needed to swing the decision)
3) No incentive to misrepresent preferences
Problem of Clarke-Groves mechanism
What to do with the tax revenue?
- > Can’t be used for the project as it would distort incentives.
- > waste from throwing it away may exceed the benefits to society from implementing the policy
- > problem diminishes as the number of individuals increases.
Majority voting equilibrium
- > Median voter is decisive
- > no incentive to lie, as moving to the other side of the MV moves the outcome away from preferred level (same direction as lie)
- > inefficient, unless MV’s prefs coincide with mean prefs
Impure public goods (3 cases)
1) Congested goods: as # of consumers rises, total benefits rise but benefits per consumer falls (art gallery, roads)
2) Club goods: excludable, with congestion. Private provision is feasible and possibly efficient
3) Local public goods: not necessarily rival or congested (eg. public park)
Buchanan’s club model
Club should increase its membership fee up to where marginal disutility to members is EXACTLY offset by additional fee from incoming member
