public goods and economic efficiency presented by cheng yi lik
TRANSCRIPT
Public Goods and Economic Efficiency
Presented by Cheng Yi Lik
Private Goods its consumption by any one person would
reduce the amount available for others e.g., a piece of land, an apple, etc
Public Goods its consumption by any one person does
not reduce the amount available for others can be consumed concurrently by many
individuals at the same time e.g., outdoor circus, national defense, TV
programme, lighthouse, etc
Public Goods
Private Goods vs. Public Goods is a matter of degree capacity limits are met well before a good
has become equally available to all quality of the good may change because of
the increasing number of users many goods lie in the intermediate range of
the spectrum between wholly public and wholly private
Private Goods vs. Public Goods
Private Firms
Private Good Public Good
Government
Example Lighthouse Broadcast programme National defense Stage performance
Example
Problems in the Pricing of Public Goods
1. The problem of joint supply or indivisibility- to charge a price for its use would restrict
its total use value (waste)2. The problem of marginal cost pricing- Pareto condition requires that all goods be
sold at a P equal to their MC of production- no revenue will be generated if public
goods are sold at MC
Problems in the Pricingof Public Goods
Problems in the Pricingof Public Goods
P
MC = 0Q0
(a)
AC = AVC + AFCMC = MVC = AVC
P
0(b)
Q
Problems in the Pricing of Public Goods
3. The problem of exclusion- once a public good is produced is
produced, it can be consumed by all individuals
- people who do not pay for the good cannot be excluded from the benefits (free-riders)
Private Production of Public Goods
Lump-sum fee Perfect price discrimination Patents and copyrights (e.g., music or
song) Time price (e.g., broadcast programme)
Natural Monopoly/ Decreasing Cost Industries
the AC of production declines continuously the MC is always less than the AC the firm would suffer loss since the AC is
higher than the price if transaction costs are zero, a private firm
still produce efficiently if perfect price discrimination or a lump-sum fee is allowed
Natural Monopoly/ Decreasing Cost Industries