Microeconomics—Public Goods

Excludable Good

A good is excludable if the supplier of that good can prevent people who do not pay from consuming it.

Rival in Consumption Good

A good is rival in consumption if the same unit of the good cannot be consumed by more than one person at the same time.

Private Good

A good that is both excludable and rival in consumption is a private good.

Nonexcludable Good

When a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it.

Nonrival in Consumption Good

A good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

Four Types of Goods

-Private goods (rival in consumption & excludable) -Artificially scarce goods (nonrival in consumption & excludable) -Common resources (rival in consumption & nonexcludable) -Public goods (nonrival in consumption & nonexcludable)

Goods that are nonexcludable suffer from what problem and why? What impact does this problem have on production and why?

Goods that are nonexcludable suffer from the free-rider problem: individuals have no incentive to pay for their own consumption and instead will take a free ride on anyone who does pay. This leads to inefficiently low production because consumers will not pay producers.

What is the efficient price for consumption of a nonrival consumption good?

When goods are nonrival consumption, the efficient price for consumption is zero.

What happens if a positive price is charged to compensate producers for a nonrival consumption good?

If a positive price is charged to compensate producers for the cost of production, the result is inefficiently low consumption.

What is a public good? What are examples?

A public good is a good that is both nonexcludable and nonrival in consumption. Examples of public goods: disease prevention, national defense, scientific research.

What is the marginal social benefit of an additional unit of a public good equal to?

The marginal social benefit of an additional unit of a public good is equal to the sum of each consumer’s individual marginal benefit from that unit.

At the efficient quantity of a public good, what does the marginal social benefit equal?

At the efficient quantity, the marginal social benefit equals the marginal cost of providing the good.

Why don’t individuals have an incentive to pay for providing the efficient quantity of a public good?

No individual has an incentive to pay for providing the efficient quantity of a public good because each individual’s marginal benefit is less than the marginal social benefit.