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Lecture 10

ECON 20A Lecture 10: Lecture 10

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William Branch

Lecture 10 I. Main Idea a. Some goods (e.g., national defense) provided without market prices b. Private markets will fail to provide enough of the good c. Another area where government can improve market outcomes II. Types of Goods a. Classify goods based on 2 criteria i. Excludability the property of a good whereby a person can be prevented from using it ii. Rivalry in consumption the property of a good whereby one persons use diminishes other peoples use iii. Private goods rival, excludable iv. Common resources rival, not excludable v. Club goods not rival, excludable vi. Public goods not rival, not excludable III. Public Goods a. Nonexcludable and nonrival b. Freerider a person who benefits from a good but does not pay for it c. Example i. Suppose I decide to shoot fireworks rom my backyard and charge 25person ii. You could pay the 25, or sit on the sidewalk in front of my house and enjoy it just as much iii. You are free riding on the provision of fireworks iv. Very few would pay since I cant exclude and freeriders get just as much enjoyment (nonrival) v. So, I would choose not to provide fireworks d. The government can overcome freeriding by providing fireworks as a public good e. Charge everybody for the fireworks by a tax f. Externality private market doesnt take into account the private enjoyment and the market fails to reach socially optimal amount of fireworks g. Public goods are another example of how government can improve on market outcomes h. Other examples i. National defense ii. Basic research iii. Fighting poverty i. Difficulties in Public Provision i. In principle, government can achieve social optimum provision of public goods ii. However, need to accurately calculate social value of public goods iii. Costbenefit analysis can be difficult to do accurately IV. Common Resources
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