Deck 27: Public Goods

Question 1

Suppose a social entrepreneur needs to raise money for a public good.He has to allocate his fund raising package to activities that persuade people of the importance of the public good and to activities that make people feel good about giving.As the population gets large, which of these do you think he will increasingly emphasize?

Answer 1

As the population gets large, the free rider problem becomes larger -- which means that just convincing someone that the public good is important won't raise much money. But making someone feel good about giving is all about generating private benefits from giving -- and that is unaffected by how many individuals there are.Thus, one would expect the fund raising to increasingly focus on making people feel good about giving rather than persuading them of the importance of the public good.

Question 2

We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem, it cannot eliminate it."

Answer 2

The private benefits one gets from giving keep us giving even when the number of individuals increases and the free rider problem gets large. However, the free rider problem is still there -- to the extent to which we value the public good, we give too little relative to the efficient level. Only if the only utility we get is from the warm glow does the free rider problem disappear -- but that's because the public goods problem has then disappeared.

Question 3

Suppose some people like national defense and others are offended by it -- i.e.some people derive positive marginal benefit and others derive negative marginal benefit.Efficiency then demands that national defense is produced until the sum of the positive marginal benefits is equal to the (absolute value) of the negative marginal benefits.

Answer 3

False

Question 4

If a public good is financed through Lindahl prices, those whose total willingness to pay for the public good is high will end up paying a higher Lindahl price than those whose total willingness to pay for the public good is low.

Question 5

Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.

Question 6

Communities may form competitive markets for providing certain types of non-pure public goods.

Question 7

The optimal subsidy for private giving to a public good increases as the number of people benefiting from the public good increases.

Question 8

If everyone has identical preferences over public goods, Lindahl prices for providing the efficient level of the public good will be the same for everyone.

Question 9

If the formation of Lindahl prices to support an efficient level of public goods is derived from individuals' reporting their marginal willingness to pay, people will under-report their true willingness to pay.

Question 10

When the government contributes to a public good, private contributions will fall.

Question 11

Firms are much more likely to provide non-excludable public goods than excludable public goods.

Question 12

Tiebout local public good provision is more easily implemented than a Lindahl equilibrium -- because people know each other's tastes locally and can more easily come up with the right way to divide the cost for public goods.

Question 13

If giving to public goods is subsidized through deductions under a progressive income tax, the government subsidizes public goods consumed by higher income individuals at greater rates than public goods consumed by lower income individuals.

Question 14

Consider a game where individuals are asked to contribute to a public good.Then consider the best response function for individual i, with individual i's contribution measured on the vertical axis and "the average contribution by everyone else" on the horizontal.Then as the number of individuals increases, i's best response function shifts in.

Question 15

Our free-rider model of voluntary giving suggests that, when the government subsidizes private giving to charity, it's contribution will simply "crowd out" the private contributions so long as no one is at a corner solution.

Question 16

In a game where individuals are asked to contribute to a public good, best response functions slope down because each individual believes the other will not give very much.

Question 17

If private giving to public goods involves externalities, what is a Pigouvian solution to the public goods problem?

Question 18

Public goods arise because of externalities.

Question 19

What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?

Question 20

In our study of monopoly, we found that monopolists can increase profit by segmenting the market and price discriminating (under third degree price discrimination).Now suppose a firm is producing an excludable local public good.Can you justify a form of such market segmentation and price discrimination as efficient?

Question 21

Suppose you run a charity that raises money for a worthy public good.Your donors may be concerned about how much of each dollar that is raised is put back into more fund-raising.
a.Suppose the marginal product of a dollar put into fundraising is initially increasing but eventually diminishing.How much will the last dollar spend on fundraising raise?
b.If everyone considers their own contribution to this charity as the marginal contribution, what will be their impression of how much they are really helping the public good?
c.Would you expect your answer to (b) to make it harder for you to raise money for your charity?
d.How might your answer to (c) explain why some charities make a point of informing people that they have placed a cap on their fund raising budget -- or that they have placed a cap on how many people will be approached during the fund raising campaign?