ECON1010 Introductory Microeconomics
Introductory Microeconomics
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ECON1010
Introductory Microeconomics
LECTURE 11
Public Goods
Q1. The market equilibrium price and output will be too
low, compared to the socially optimal price and output, for
an economic activity if it creates:
(a) a negative externality.
(b) no externality.
(c) any type of externality
(e) need more information to reach a conclusion.
(d) a positive externality.
Last lecture feedback
Plan of Lecture 11.
Lecture 11 ECON1010 3
1. Last week, we discussed how competitive
markets can produce inefficient outcomes in the
presence of externalities.
2. This lecture, another example of how competitive
markets can produce inefficient outcomes in
providing public goods.
Lecture 11 ECON1010 4
Non-rivalrous Rivalrous
Non-excludable Public Common
Excludable Collective Private
Four Different Types of Goods
Rivalry
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x
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a
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The extent to which consumption of a good (or
service) by one person lessens its availability for
others. eg: driving a car
Rivalry
Lecture 11 ECON1010
The extent to which the consumption of a good
(or service) by one person does NOT lessen its
availability for others.
eg: watching 7pm TV news.
Non-rivalrous
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The extent to which non-payers can be excluded
from consuming a good or service (most of the
time!) eg: buying a new car. If can’t pay for it,
excluded from getting the car.
Excludability
Non-payers are able to consume the good or
service. eg: gaining benefits of national defense
even if not paying taxes.
Non-Excludability
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Goods and services that have characteristics of
being both non-rivalrous and non-excludable.
Examples:
Public Goods (the focus of this lecture)
Lecture 11 ECON1010
1. Fire works displays
2. Free to air TV
3. Street lights
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Goods and services that have characteristics of
being both rivalrous and excludable.
Examples:
Private Goods
Lecture 11 ECON1010
1. hamburger
2. massage
3. plane flight
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Goods and services that have characteristics of
being both rivalrous and non-excludable.
Examples:
Common Goods
Lecture 11 ECON1010
1. fish in the ocean
2. atmosphere
3. firewood from a forest
The “tragedy
of commons”
Goods and services that have characteristics of
being both non-rivalrous and excludable.
Examples:
Collective Goods
1. Pay TV
2. Uncrowded toll road
Note: in the tutorials, discuss examples that can
be found on campus at UQ.
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All goods do not necessarily fit neatly into one of
the four boxes relating to excludability and rivalry.
Example: Public road
A comment!
a. During peak hour, the road is non-excludable
and rivalrous = common good
b. During off-peak hour, the road is non-
excludable and non-rivalrous = public good
Non-rivalrous Rivalrous
Non-excludable Public Common
Excludable Collective Private
Rivalry
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Lecture context – who should provide the
goods and services we consume?
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1. The role of the government is to make laws that:
• aim to control negative externalities
2. The role of the private firms (aim to profit maximise)
Getting the balance right is the key as it affects people’s
well being.
• enable markets to operate
• promote competition and restrain market power
3A Focus on Providing of Public Goods.
Q1. Is there any incentive for an individual (or firm)
to provide public goods?
13Lecture 11 ECON1010
Q3. If governments are to fund public goods, how
can the revenue be best raised to pay for them?
Q2. Can providing public goods be socially efficient?
Individuals & incentives in providing public goods.
Bob and Ed live on two properties in the outback.
Water is scarce. However, drilling a well can provide a
reliable water source.
A pumping station can be installed to access the
underground water at a total cost of $12 000.
Sufficient water will be available to make it non-
rivalrous. The pump stations will be located on a boundary
corner of both properties. Neither Bob nor Ed would be
excluded from using the water. Both desire the pumping
station to be built.
Bob earns twice as much as Ed. Bob would be willing to
pay $9 000 while Ed would be willing to pay $4 500.
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Q1: Would Bob or Ed be willing to pay the full
cost of constructing the pumping station?
Cost Benefit Principle:
Do it when the MB ≥ MC
Individually, neither Bob nor Ed would pay
for the pumping station.
For Bob, MB = , MC =
Decision: MB < MC, so Bob won’t pay for it.
$9 000 $12 000
For Ed, MB = , MC =
Decision: MB < MC, so Ed won’t pay for it.
$4 500 $12 000
15 Lecture 11 ECON1010 16
Q2: Is it socially efficient for Bob and Ed to share
the funding to construct the pumping station?