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Chapter 5

ECON 1010 Chapter 5: Topics 30

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ECON 1010
Laura K.Brown

OS82 ECON101 0 PUBLIC GOODS NONRIVALRY AND NONEXCLUDABILITY Private goods are rivalrous and excludable Public goods are neither rivalrous and excludable NonRivalry: One individuals consumption of the good does not impede another individual from consuming it as well: the marginal cost of providing the public good to an additional individual is equal to zero. NonExcludability: No one can be excluded from consuming the good. Nonrivalry is related to the marginal cost of production: unlike a private good, the marginal cost of providing the public good to an additional user is zero. Pure Public Goods: Pure Public Goods represent goods that are perfectly nonrivalrous and nonexcludable. E.g. lighthouse Impure Public Goods: Impure Public Goods represent goods that are nonrivalrous and non excludable only up to a point. E.g. motorway AGGREGATING INDIVIDUAL DEMANDS: MARGINAL SOCIAL BENEFIT AND EFFICIENCY To construct the aggregate demand for a public good you have to sum the individual demands vertically Because of the nonrivalry nature of public goods, when one individual pays for a good, the other also enjoys the benefits generated. As long as the marginal social benefit is greater than the marginal cost, the action should be taken out. Efficient quantity: marginal social benefit = marginal cost. Marginal Social Benefit: The Marginal Social Benefit is the vertical sum of the individual marginal benefits. Samuelson Condition: The Samuelson Condition states that the efficient quantity of a public good is found by setting the sum of the individual marginal benefits equal to the marginal cost.
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