Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 4 The Economics of the Public Sector
Chapter 11 of 36 Public Goods and Common Resources
Section 5 of 14
…
Per Figure 1:
Goods can be grouped into four categories using two characteristics.
A good is excludable if
people can be prevented from using it
A good is rival in
consumption if one person's use of the good lessens other people's use of it.
…
Consider a fireworks show to understand how public goods
differ from other goods and the problems they present for society.
Fireworks are a public good, because
· not excludable, it’s not possible to prevent someone from
seeing them
· not rival in consumption, one person's enjoyment of them
doesn’t reduce other people’s enjoyment
…
The citizens of Smalltown have a fireworks show each Fourth
of July.
Each of the 500 residents place a $10 value on seeing the
show for a total benefit of $5000.
The fireworks show cost is $1000.
Because the $5000 benefit exceeds the $1000 cost it is
efficient for Smalltown to have a fireworks show.
…
The private market would probably not produce an efficient
outcome.
Suppose Smalltown businessperson Ellen decides to put on a
fireworks show,
hoping to make a profit or at least break even.
Ellen would have trouble selling tickets for her show,
because her potential customers know they can see the fireworks without paying.
Fireworks are not excludable and people have incentive to be
free riders.
A free rider is someone who receives benefit of a good
without paying for it.
…
In a free rider situation the market fails to provide the
efficient outcome.
This market failure arises because of an externality.
If Ellen puts on the fireworks show she gives
an external benefit to people who see the show without paying for it.
Even though Ellen’s fireworks show is socially desirable, she
cannot put it on and break even on costs.
So, Ellen makes the privately rational but socially inefficient
decision not to put on the show.
…
The solution to Smalltown's problem is for the local government
to finance the fireworks show.
The town council
· raises the 500 residents’ taxes by $2 for a $1000 fund for
the fireworks show
· pays Ellen the $1000, covering her costs, to put on the
show
Everyone in Smalltown is better off by $8, they paid a $2
tax cost and got a $10 entertainment benefit.
…
This example shows a general lesson about public goods.
Because public goods are not excludable the free-rider
problem prevents the private market from supplying them.
The government can remedy the free-rider problem and make
everyone better off.
… …
free-rider
furīraidā
フリーライダー
Comments
Post a Comment