Thursday, March 4th, 2010.
1) Pure Public Goods
Caveat: Coase Theorem
1. Is good excludable?
Is good rival in consumption?
2. No (to both) => public good
Example: street lighting
(ie. FDQ¶WVWRSDSHGHVWULDQIURPEHQHILWLQJIURPLWHYHQLIKH/she did
not contribute to this good, and WKHUH¶VQRrivalry/competition)
3. Private markets will not produce public goods.
4. How much of public good should be produced (for allocative efficiency)?
Sum of marginal benefit to individuals = marginal cost
Social cost private cost (production externality)
Private value social value (consumption externality)
Ö Market outcome is not efficient ³PDUNHWIDLOXUH´
SS (private cost)
DD (private value)