Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 14] GENERAL EQUILIBRIUM AND WELFARE ECONOMICS 335
(b)
by the intersection of D T and S y , at point E. From Fig. 14-18 we can see that when good Y is a public good,
individuals A and B each consume 10 units of it.
See Fig. 14-19. The figure shows that the market demand curve for good Y when it is a private rather than a
public good is obtained by the horizontal summation of the demand curves of individuals A and B for the
good. This is given by D 0 T in the figure. With D T and S y , the equilibrium price for good Y is $5.33 and the
equilibrium quantity is 9. This is given by the intersection of D 0 T and S y at point E 0 . These compare with
PY ¼ $6 and QY ¼ 10 when good Y is a public good (see Fig. 14-18). From Fig. 14-18 we can see that
when good Y is a private good, individual A consumes 2 units and individual B consumes 7 units of the
good (compared with 10 units of the good by each individual when good Y is a public good).
14.26 (a) Explain the distinction between public goods and good supplied by the government, and give some
examples (b) What type of public goods can be provided only by the government? (c) Explain why
public goods give rise to a free-rider problem.
(a)
(b)
(c)
All goods and services provided by the government are public goods (i.e., are nonrival in consumption), but
not all public goods are, or need be, provided by the government. Those public goods that exhibit nonexclusion
(i.e., those for which each user can be charged) can be, and in fact often are, provided by the private
sector. An example of a public good that is provided by the government and exhibits nonexclusion is national
defense. An example of a public good that does not exhibit nonexclusion and is provided by private firms is a
cable TV program. An example of a public good that does not exhibit nonexclusion (so that it could be
provided by private firms but is often provided by the government) is garbage collection.
Public goods that exhibit nonexclusion can be provided only by the government. Private firms will not provide
these goods because they cannot exclude nonpaying users of these goods. The government generally raises the
funds needed to pay for the public goods it provides by taxing the general public. The government can then
either produce the goods itself or (more likely in the United States) it can pay private firms to produce those
goods (as, for example, most items of national defense).
Public goods give rise to a free-rider problem because each individual believes that the same amount of the
public good will be supplied whether or not he or she shares in the cost of providing it. This leads to the undersupply
of the public good, which prevents the attainment of Pareto optimum and requires government
intervention.