Econ File

General term used for goods & services

provided by government

Government provides pure public, impure

public & private goods

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

Pure public goods are:

◦ Non-rival in consumption:

 MC of an additional consumer is 0.

 If public good is excludable, there may be underconsumption.

 Ex. Toll bridge

◦ Non-excludable:

 Not being able to charge for the good may result in

undersupply.

 Free-rider problem: no incentive to reveal true

preferences since the public good will be provided no

matter what.



Pure private goods are:

◦ Easily excludable (e.g. low transactions cost)

◦ MC of an additional consumer is high;



Impure public goods:

◦ Non-rival & excludable: MC=0 (e.g. cable TV)

◦ Rival: has high MC because of easy access, e.g.

easily congested roads.

 The MC is not only the depreciation of the road but

also the time lost to traffic.

 Excluding via toll booths is costly and may also cause

congestion .

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

Impure public goods:

◦ Exclusion or Rationing: The issue is the cost of

rationing and not feasibility of producing the good

 Cable TV is excluded with costly scramblers.

 The congested highway is excluded by tolls wherein

collecting tolls is the cost of exclusion while the

benefit is less congestion.

 Cost of exclusion is called transactions cost. These are

relatively larger for public goods than private goods.

I

Rival

Excludable

(toothbrush)

II

Rival

Non-excludable

(congested highway)

III

Non-rival

Excludable

(cable TV)

IV

Non-rival

Non-excludable

(national defense)

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Publicly provided private goods (PPG):

publicly provided goods with a large MC

associated with supplying additional

individuals.

Rationales:





◦

◦

◦

High costs of running the market (i.e. water &

electricity);

Distributive concerns (i.e. school):

opportunities of the young should not depend

on wealth of the parents;

Analysis of welfare...