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