A Public Good is defined by PREFERENCES + TECHNOLOGY,

NOT BY WHETHER OR NOT IT IS PUBLICLY PROVIDED.

Examples:� Bridges, �military, �legal system

Governments provide other (private) goods:� education.

Some public goods are provided privately:� TV broadcasts.

CHARACTERISTICS OF PUBLIC GOODS

1.� NONRIVAL:� Providing to another agent does not reduce benefit to others.

Private goods are RIVAL:� if one agent benefits from them, others can�t.

2.� NONEXCLUDABLE:� Costly to exclude users once it is provided.

Example:� Fireworks.

�

A PURE PUBLIC GOOD IS NONRIVAL AND NONEXCLUDABLE.

More Public Goods:�� Honesty,�� Income Distribution,�� Research Output

Private provision of public goods:�� Broadcasts, Transit,� Communications

Public provision of private goods:� Education, Parks, Power, Airlines, Renault

Efficient Provision of Private Goods without externalities:

MRS = price = marginal cost,�� holds in competitive equilibrium.

Efficient Provision of Pure Public Goods:� Sum of MRS's = marginal cost.

Private provision is typically too low. ��FREE RIDERS: benefit without paying.

Examples:� Gnutella file-sharing.� 70% of downloaders never contribute.

Sematec research.

Exceptions:� bundling in broadcasting,� cooperation in British lighthouses.

Public provision often less efficient than private:

15% higher cost in Renault, Air France.

Canadian public railroads, U.S. parks have costs similar to private firms.

Public provision cheaper:� SS annuities less than 1/10 the admin. cost of private.

Large scale with increasing returns.

Problem with public provision: lack of competition?�� Phoenix garbage collection.

Education publicness:�� MC/AC < 1, but not very small.

Students get positive average return.

Other publicness:� Common background,� political awareness,� docility

*Research externality,�� buyer as input,�� education as signal.

*Local Public Goods

Example:� Public education can reduce education expenditure.

Expenditure effective?� Exp/pupil� doubled since 1970,� SAT's fell.

Rise in expenditure on special ed,�� language,� administration.

Rise in experienced teacher pay,�� fall in new teacher pay.

High return to early education expenditure,�� Heckman (NBER 7288, 1999).

Milwaukee Charter school experiment:� charter students do slightly worse,

traditional public school students do slightly better.

Vouchers:� Effects depend on parents' decisions and schools' reactions.

Issue:�� Separation of church and state.

Debate over Hoxby (2002)� �public schools improve with competition.�

SUMMARY

1.� Pure public goods:� nonrival and nonexcludable.

Many impure public goods (somewhat nonrival).

2.� Public goods may be privately provided.

3.� Private goods may be provided by governments.

4.� Efficient provision of private goods without externalities:

MC = MRS = Marginal willingness to pay for every consumer

5.� Efficient provision for pure public goods:

MC = Sum of MRS's = total of consumers' marginal willingnesses to pay

6.� Education:� mostly private, produces some partly public goods.