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CHAPTER

5

Public Goods

PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-2

Public GoodsPublic Goods

Many defini ions in useMany defini ions in use!ocus on c"a#ac e#is ics "a mi$" cause!ocus on c"a#ac e#is ics "a mi$" cause

#esou#ces o be misalloca ed#esou#ces o be misalloca edNo %us &ublic &#o'isionNo %us &ublic &#o'isionOne of (o c"a#ac e#is ics:One of (o c"a#ac e#is ics:

Collec i'e Consum& ionCollec i'e Consum& ionNone)cludabili yNone)cludabili y

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-3

Collective Consumption GoodsCollective Consumption Goods

Consum& ion by one consume# (ill noConsum& ion by one consume# (ill no#educe "e consum& ion of any o "e##educe "e consum& ion of any o "e#consume#consume#MC * +MC * +E)am&le: #adio b#oadcas si$nalE)am&le: #adio b#oadcas si$nal

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-4

The Argument for PublicThe Argument for PublicSector ProductionSector Production

, efficien ou &u le'el P*MC, efficien ou &u le'el P*MCMC * + fo# collec i'e consum& ion $oodMC * + fo# collec i'e consum& ion $ood

!o# efficiency- P * +!o# efficiency- P * +P#i'a e sec o# (ill no &#oduce efficienP#i'a e sec o# (ill no &#oduce efficienle'el of ou &ule'el of ou &u

Solution:Solution: Go'e#nmen &#oduc ion a .e#oGo'e#nmen &#oduc ion a .e#o&#ice&#ice

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-5

The Argument for PrivateThe Argument for PrivateSector ProductionSector Production

Lac/ of con$es ion mi$" be because ofLac/ of con$es ion mi$" be because of&as o'e#&#oduc ion&as o'e#&#oduc ion

P#i'a e &#oduc ion &#o'ides a #e'ealedP#i'a e &#oduc ion &#o'ides a #e'ealed&#ice mec"anism&#ice mec"anismPublic &#oduc ion is financed "#ou$"Public &#oduc ion is financed "#ou$"

a)a iona)a ionBenefi s of &#oduc ion 's0 e)cess bu#denBenefi s of &#oduc ion 's0 e)cess bu#den

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-6

Congestion of CollectiveCongestion of CollectiveConsumption GoodsConsumption Goods

Collec i'e consum& ion $oods canCollec i'e consum& ion $oods canbecome con$es edbecome con$es ed

Collec i'e consum& ion is an economicCollec i'e consum& ion is an economicconce& - no ec"nolo$icalconce& - no ec"nolo$icalCanno e'alua e based on $ood1sCanno e'alua e based on $ood1sc"a#ac e#is icsc"a#ac e#is icsExample:Example: s(immin$ &ools(immin$ &ool

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-7

The ptimal utput of aThe ptimal utput of aCollective Consumption GoodCollective Consumption GoodP#i'a e consum& ion $oodsP#i'a e consum& ion $oods

Ma#/e demand de e#mined by "o#i.on allyMa#/e demand de e#mined by "o#i.on allysummin$ indi'idual demand cu#'essummin$ indi'idual demand cu#'es

Collec i'e consum& ion $oodsCollec i'e consum& ion $oodsMa#/e demand de e#mined by 'e# icallyMa#/e demand de e#mined by 'e# icallysummin$ indi'idual demand cu#'essummin$ indi'idual demand cu#'es

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-8

The ptimal utput of aThe ptimal utput of aCollective Consumption GoodCollective Consumption Good

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-9

!indahl Pricing!indahl PricingSe so eac" indi'idual &ays a ma#$inalSe so eac" indi'idual &ays a ma#$inal&#ice e2ual o "e ma#$inal benefi "a&#ice e2ual o "e ma#$inal benefi "aindi'idual #ecei'esindi'idual #ecei'es

No necessa#y fo# "e efficien le'el ofNo necessa#y fo# "e efficien le'el ofou &uou &u

Indi'iduals canno ad%us indi'idual 2uan i yIndi'iduals canno ad%us indi'idual 2uan i y

consumedconsumedP#ice does no "a'e o e2ual consume#1sP#ice does no "a'e o e2ual consume#1sma#$inal 'alua ion o be efficienma#$inal 'alua ion o be efficien

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-10

!indahl Pricing!indahl Pricing

,d'an a$e: e'e#yone &#efe#s same le'el,d'an a$e: e'e#yone &#efe#s same le'elof ou &uof ou &u

Inc#eases li/eli"ood "a efficien le'el ofInc#eases li/eli"ood "a efficien le'el ofou &u is c"osenou &u is c"osenP#ac icali y3P#ac icali y3

Ea#ma#/ed $asoline a)esEa#ma#/ed $asoline a)es!inancin$ &ublic educa ion "#ou$" &#o&e# y!inancin$ &ublic educa ion "#ou$" &#o&e# y

a)a iona)a ion

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-11

Pure and "mpure CollectivePure and "mpure CollectiveConsumption GoodsConsumption Goods

If eac" consume#1s consum& ion s"a#e is aIf eac" consume#1s consum& ion s"a#e is afunc ion of o al ou &u - o& imali yfunc ion of o al ou &u - o& imali ycondi ion "olds #e$a#dless ("e "e# &ubliccondi ion "olds #e$a#dless ("e "e# &ublico# &#i'a e $oodo# &#i'a e $ood,ny ime consume# canno 2uan i y,ny ime consume# canno 2uan i yad%us ed- o& imali y condi ion "oldsad%us ed- o& imali y condi ion "oldsExample:Example: &ublic educa ion&ublic educa ion

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-12

#onexcludabilit$#onexcludabilit$

Once &#oduced- i is difficul o /ee&Once &#oduced- i is difficul o /ee&&eo&le f#om consumin$ "e $ood&eo&le f#om consumin$ "e $ood

Un#ela ed o collec i'e consum& ionUn#ela ed o collec i'e consum& ion4oes no "a'e o be &ublicly &#o'ided4oes no "a'e o be &ublicly &#o'idedExample:Example: Na ional defenseNa ional defense

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-13

#onexcludabilit$ as a#onexcludabilit$ as aPrisoner%s &ilemmaPrisoner%s &ilemma

!#ee #idin$!#ee #idin$Incen i'e o benefi f#om "e $oodIncen i'e o benefi f#om "e $ood

(i "ou con #ibu in$ o &#oduc ion(i "ou con #ibu in$ o &#oduc ionSelf5in e#es * e'e#yone f#ee #idesSelf5in e#es * e'e#yone f#ee #idesInabili y o coo&e#a e leads o &#isone#1sInabili y o coo&e#a e leads o &#isone#1s

dilemmadilemma

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-14

#onexcludabilit$ as a#onexcludabilit$ as aPrisoner%s &ilemmaPrisoner%s &ilemma

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-16

#onexcludabilit$ and Collective#onexcludabilit$ and CollectiveConsumption in Public GoodsConsumption in Public Goods

Pu#e &#i'a e $oodPu#e &#i'a e $oodE)cludable- &#i'a e in consum& ionE)cludable- &#i'a e in consum& ion

Pu#e &ublic $oodPu#e &ublic $oodNone)cludable- collec i'e consum& ionNone)cludable- collec i'e consum& ion

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-17

#onexcludabilit$ and Collective#onexcludabilit$ and CollectiveConsumption in Public GoodsConsumption in Public Goods

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PUBLIC SECTOR ECONOMICS:The Role of Government in the American Economy

Randall Holcombe 5-18

Public Polic$ To'ards PublicPublic Polic$ To'ards PublicGoodsGoods

Public $oods do no "a'e o be &#oducedPublic $oods do no "a'e o be &#oduced&ublicly&ubliclyExamples:Examples:

Mic#ocom&u e# sof (a#eMic#ocom&u e# sof (a#eTele'isionTele'isionRadioRadio