presentation public good

7/30/2019 Presentation Public Good

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HOW USERS CHARGES FOR PUBLICGOODS CAN BE SET TO ACHIEVE

EFFICIENT LEVEL OF OUTPUT?

PRESENTED BY :

NURUL SYAHIDA BINTI HASSAN

NOOR SHAFIQAH BINTI RAMLY


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OBJECTIVES OF THE STUDY

To define the public goods and discuss their characteristics.

To discuss when should a public good be provided.

To determine the reasons for charges the consumption of public

goods.

To determine the conditions for efficient output of public goods

To discuss the way to achieve efficient level of output.

To explain the Lindahl equilibrium.


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WHAT IS PUBLIC GOODS?

A public good is provided efficiently at the

level where the combined marginal rate of

substitution of all individuals is equals to the

marginal rate of transformation.


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CHARACTERISTIC OF PUBLIC

GOODS


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PRICE EXCLUDABLE PUBLIC

GOODS

There are external benefits when produced or

consumed but exclusion is easy.

Example : Country Clubs


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CONGESTIBLE PUBLIC

GOODS

There are public goods where after a point, the

enjoyment received by the consumer is diminished

by crowding or congestion.

Example : roads and parks


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Examples

ofPUBLICGOOD


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WHEN SHOULD PUBLIC

GOOD BE PROVIDED?

When the individuals are willing to pay for the public good, then the

government should provide the public goods.

Ex: Wana and Ayu wants to have a aquatic museum (like AQUARIA) in

their residential area. Wana is prepared to pay up to RM25 for the entrance

fee, while Ayu is willing to pay up to RM15. the total value to the two

individuals of having the park is RM40. if the cost of maintenance is

RM30, there is a RM10 gain on its production since it provides service that

the community values at RM40 at a cost of maintenance only RM30.


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WHY CHARGE FOR PUBLIC

SERVICES?

a) To improve the efficiency with which the users

(Malaysian) in general and federal public agencies in

particular make use of resources they have available.

b) To promote economic efficiency by providing

information to public sector suppliers on how much

clients are actually willing to pay for particular

services.


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a. To charge for many publicly provided goods

and services. This approach helps allocate

use of goods or services in a rational way

because it prevents waste through excessive

or badly targeted consumption.

b. It also makes for easier comparisons with the

private sector, promotes competition and

helps develop markets.


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EFFICIENT OUTPUT OF A

PUBLIC GOOD

Use LINDAHL EQUILIBRIUM.

Voluntary contribution = MB


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FIGURE 4.6 EFFICIENT OUTPUT OF A PUBLIC

GOOD

Security Guards per Week

100

200

300

400

500

600

700

800

MarginalBene

fit(Dollars)

0 1 2 3 4 5

MBAMBB

MBC

D= MBi= MSB

MC = AC= MSBE


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As before, assume that the public good is available to the community atconstant marginal cost, indicated by the curve MC. We adopt the conventionthat tax-prices per unit of the good are to be uniform over various quantities

for each person, although, of course, these need not be uniform as amongseparate persons. This step allows us to derive demand curves for the publicgood in the orthodox fashion. Conceptually, we simply confront eachindividual with the opportunity to purchase or to vote for a most preferred

quantity at each price (marginal = average).


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HOW TO ACHIEVE EFFICIENT

LEVEL OF OUTPUT?

Lindahl equilibrium can be achieved by

assigning each participant a Lindahl price

per unit of the public good.


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The socially optimal level of the public good

requires that we set the Marginal Social Benefit of

that good equal to its Marginal Social Cost.

MSB = MSC


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MATHEMATICALLY:LINDAHL

PRICING

Recall from Figure 4.5 that the marginal social benefit for a pure

public good is the sum of the individual marginal benefits.

That is : MSB = MB.

Efficient output is therefore:

MSB = MB =MSC.


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A NUMERICAL EXAMPLE

Number of Security Guardsper Week

1 2 3 4

MBA $300 $250 $200 $150

MBB $250 $200 $150 $100

MBC $200 $150 $100 $50

MB $750 $600 $450 $300


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If the cost of security guards is $450 perweek, then no individual will hire even oneguard, even though to the group one guardis worth $750. The group should hire three.

If they each pay their marginal benefit, thenthree guards are hired. Person A pays$600 ($200 per guard), person B pays $450($150 per guard) and person C pay $300

($100 per guard).


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LINDAHL EQUILIBRIUM

The amount each person contributes, ti, depends on

individual desires for the public good.The sum of the contributions equals the total cost

of the public good.

tiQ* =MC(Q*) =AC(Q*)

ti=MC=AC

All individuals agree to pay their shares.


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