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  1. Public Goods •Public goods are those goods and services which are non rival in consumption and the users collectively consume its benefits • Also known as the collective consumption good
  2. Characteristics of public good Non Excludability : • Once a public good is produced its benefits cannot be confined to those who have paid for it • It is not possible to exclude anyone from consuming the good or services • Examples: National defense, fireworks display, air traffic control, police and fire protection
  3. Non excludability
  4. Characteristics of public goods 2) Non rivalry in consumption: • One person’s enjoyment of good does not diminish another person's consumption • Marginal cost for supplying public good to an extra person is zero • Examples: street lights, national defense, fresh air, police protection
  5. Non rivalry
  6. Characteristic of public goods 3) Non rejectable: • If a public good is provided then in most of the cases we cannot avoid it • Example nuclear defense system
  7. Public goods and market failure • Pure public goods are not normally provided by the private sector because they would be unable to supply for a profit • Public goods leads to market failure due to the missing market
  8. Free rider problem: • Difficult to charge people from benefitting from the goods and service • People can benefit from a public good without paying for the good • Markets often have a difficult time producing public goods because free riders attempt to use the public good without paying for it • Leads to under provision of a good
  9. Free Rider Problem
  10. Understanding free rider problem with prisoners dilemma game • If both contributes total benefit $20. each gain $10 with net gain of +$4 ($10-$6) • If one contribute and another does not then one who then total benefit will $10 , each gains $5 but the one who contributes will realize net gain of -$1 and then the one who does not pay will have net gain 0f +$5 • If neither of them contributes there will 0 cost and 0 benefit
  11. Drop in the bucket problem: • The good or service is generally very costly that its provision does not depend on whether any single individual pays • Example police force
  12. Should the government provide public goods? • The non rival nature provides a strong case for the government to provide the public goods • Government can charge people in the form of tax • State provision prevent under provision and under consumption of the public goods • Government can provide the public goods efficiently due to economics of scale
  13. Mixed goods • Goods that part private and part public • Example education