L23Public Goods -- DefinitionExamples of public goodsPark Size: Market OutcomeA: best response toSlide 6B: best response toEquilibriumFree riding by APareto efficient outcomeUnderprovision of publicImplementation of efficient outcomeL23Public GoodsPublic Goods -- DefinitionSome goods are:–Nonexcludable (NE): all consumers can consume the good.–Nonrival (NR): each consumer can consume all of the good.A good is purely public if NE and NRE NERNRExamples of public goodsNational defenseMathematical formula (Research)Nice melodyBroadcast radio and TV programsReduction in air pollutionNational parksPark Size: Market OutcomeTwo agents: A and BTwo goods: Park and BurgersPark is a public good A: Burger loverB: Park lover1x2x1 1 1A Bx x x 1 2 2 1 1( , ) 2ln( )A A A A BU x x x x x 1 2 2 1 1( , ) 4ln( )B B B A BU x x x x x A: best response to 10 ,1$21 mpp2 1 1() 2ln( )A A A BU x x x 11Bx A: best response to 10 ,1$21 mpp2 1 1() 2ln( )A A A BU x x x 1BxB: best response to 1 2$1, 10Bp p m 2 1 1() 4ln( )B B A BU x x x 1AxEquilibriumNash Equilibrium:- best response to- best response to* *1 1,A Bx x*1Ax*1Bx*1Ax*1BxFree riding by AIn Nash Equilibrium:B: Creates a park of size 4A: Does not contribute at all and uses the park created by BFree riding by ASize of the park (General rule) * *1 1, (0, 4)A Bx x Pareto efficient outcomeMayor maximizes welfare of both A and BA BU U U Underprovision of publicEfficient size of Park: 6Underprovision of public good Public good: positive externality(Pareto) optimal size (General Rule)Implementation of efficient outcomeHow to implement efficient outcome?Tax agents and provide Public GoodProblem: Information about valuationMechanism design: How to extract information in the least costly
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