Public Goods

Private provision works better when:

- Some Individuals Care More than Others: Private provision is particularly likely to surmount the free rider problem when individuals are not identical, and when some individuals have an especially high demand for the public good. - Altruism: When individuals value the benefits and costs to others in making their consumption choices. - Warm Glow: Model of public goods provision in which individuals care about both the total amount of the public good and their particular contributions as well.

Merit Goods

Commodity which is judged that an individual or society should have on the basis of some concept of need, rather than ability and willingness to pay. Typically with positive externality (so under-consumed). But why/how an outside agency can know better than the individual what is in their own (long-term) interests? Arguments typically focus on: Information - consumer fails to realise benefits of commodity AND Rationality - myopic consumers who do not account for long term effects. E.g. Vaccination and Education.

Public Good Demand

For a public good we calculate the vertical sum of individual demand.

Clarke Tax

Is it possible to design a preference revelation mechanism that is incentive compatible? Yes - labelled the Clarke tax (and related VGG - Vickery-Clarke-Groves mechanism). Creation of a transfer scheme in which it is a dominant strategy to reveal the true valuation. Works by making a large-number situation a small number situation, as the payment values are determined by the "pivotal" declaration. Faces practical difficulties. Not revenue neutral. Complex to implement.

Provision and Production

It should be noted that while there may be a need for government to intervene to ensure the efficient level of a public good, it need not be the producer of a good or service.

TV License Fee

Just over 25 million homes pay £150.50 per year in UK for TV licensing. Estimated that between 6% and 7% of those required to pay do not. That's around 1.6 million households. Around 150,000 people prosecuted each year for non-payment. About 1-in-10 criminal prosecutions in the UK.

Public Goods Experiment

Many public goods experiments allow for level of contribution to be set. That is subject can choose any value between zero and the endowment to contribute in a given round. Major findings: Generally, total contributions can be expected to lie between . . . 40 percent and 60 percent of the group optimum. Contributions decline with repetition. Face to face communication improves the rate of contribution.

Club Goods

Nonrival but excludable goods may be provided by sharing arrangements (Buchanan, 1965). Membership based (swimming pools, gyms, golf clubs). Trade off on club size between reduced costs and increased congestion (as size increases). Incentive to reveal preference is present owing to the possibility of exclusion.

Public Good

Nonrival: That is consumption of a unit of the good by one person does not affect another's opportunity to consume. Nonexcludable: People cannot deny each other the opportunity to consume a good. Very hard to envisage a pure public good. However the concept is useful for understanding provision of goods that have nonrival or nonexcludable characteristics. Impure public goods may only exhibit one of the characteristics. Technology may lead to changes (terrestrial TV).

Is the efficient level of a Public Good feasible?

Problem for competitive market? Consumers differ in the price they value the quantity of the good at. Requirement for consumers to have individual prices. Perfect price discrimination. Potentially implemented though individual taxes (Lindhal Equilibrium). Solution depends on the extent to which people reveal their true preferences for the public good. There is an incentive to underplay the level of preference for a public good. Free Rider problem. One individual's best response to the action of another may not lead to the social optimum.

Efficient level of Public Good (technical)

Technically efficiency condition given by the Samuelson rule (Samuelson, 1954). The sum of the marginal rate of substitutions for the all the consumers should be set equal to the marginal cost.

Provision

Two main things to consider: 1. How to asses the level provision of a good that is nonrival and nonexcludable? Good may not be equally valued by all consumers. 2. How the public good should be provided? May determine that government intervention is required to ensure sufficient level of provision, but may be implemented through a private method.