Exam 27: Public Goods

Communities may form competitive markets for providing certain types of non-pure public goods.

Public goods arise because of externalities.

When the government contributes to a public good, private contributions will fall.

In a game where individuals are asked to contribute to a public good, best response functions slope down because each individual believes the other will not give very much.

Tiebout local public good provision is more easily implemented than a Lindahl equilibrium -- because people know each other's tastes locally and can more easily come up with the right way to divide the cost for public goods.

If everyone has identical preferences over public goods, Lindahl prices for providing the efficient level of the public good will be the same for everyone.

If private giving to public goods involves externalities, what is a Pigouvian solution to the public goods problem?

Suppose you run a charity that raises money for a worthy public good.Your donors may be concerned about how much of each dollar that is raised is put back into more fund-raising. a.Suppose the marginal product of a dollar put into fundraising is initially increasing but eventually diminishing.How much will the last dollar spend on fundraising raise? b.If everyone considers their own contribution to this charity as the marginal contribution, what will be their impression of how much they are really helping the public good? c.Would you expect your answer to (b) to make it harder for you to raise money for your charity? d.How might your answer to (c) explain why some charities make a point of informing people that they have placed a cap on their fund raising budget -- or that they have placed a cap on how many people will be approached during the fund raising campaign?

Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.

Suppose some people like national defense and others are offended by it -- i.e.some people derive positive marginal benefit and others derive negative marginal benefit.Efficiency then demands that national defense is produced until the sum of the positive marginal benefits is equal to the (absolute value) of the negative marginal benefits.

If giving to public goods is subsidized through deductions under a progressive income tax, the government subsidizes public goods consumed by higher income individuals at greater rates than public goods consumed by lower income individuals.

We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem, it cannot eliminate it."

Consider a game where individuals are asked to contribute to a public good.Then consider the best response function for individual i, with individual i's contribution measured on the vertical axis and "the average contribution by everyone else" on the horizontal.Then as the number of individuals increases, i's best response function shifts in.

Our free-rider model of voluntary giving suggests that, when the government subsidizes private giving to charity, it's contribution will simply "crowd out" the private contributions so long as no one is at a corner solution.

What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?

In our study of monopoly, we found that monopolists can increase profit by segmenting the market and price discriminating (under third degree price discrimination).Now suppose a firm is producing an excludable local public good.Can you justify a form of such market segmentation and price discrimination as efficient?

If the formation of Lindahl prices to support an efficient level of public goods is derived from individuals' reporting their marginal willingness to pay, people will under-report their true willingness to pay.

If a public good is financed through Lindahl prices, those whose total willingness to pay for the public good is high will end up paying a higher Lindahl price than those whose total willingness to pay for the public good is low.

Firms are much more likely to provide non-excludable public goods than excludable public goods.

The optimal subsidy for private giving to a public good increases as the number of people benefiting from the public good increases.