Prof. Gaudin – Environmental Economics – Technical notes
Public goods
Goods can be classified according to their degree of “excludability” and “subtractibility”.
All goods are not pure public goods or pure private goods.
Subtractibility (Rivalry)
LOW HIGH
Excludability
DIFFICULT Public goods Common Property
Resources
EASY Toll goods
(or Club goods) Private goods
Pure public goods have 2 characteristics that separate them from private good:
• They are non-excludable: it is difficult to exclude anybody from using them .
• They are non-rival (no substractibility): One person using the good does not reduce
other peoples enjoyment of the good. Which implies that the marginal cost of one
more person enjoying the use of the good is zero.
Most public goods may have a some degree of subtractibility and there could be ways to exclude
people. But the cost of excluding is usually very high compared to the MC of use.
[Examples of public goods are numerous: Defense and security, parks, infrastructure, air, basic
research...]
Pure public goods are extreme examples of positive externalities because there is no marginal cost of
having more people to enjoy the good.
Society’s demands for public goods are found by vertically summing all individual demand
curves. [Note that this is quite different from private goods for which market demand was found by
adding the quantities demanded at each price - i.e. by horizontally summing individuals demand
curves].
Why? Since each person will be able to consume the same quantity of the public good without
reducing other’s possibilities, we should add up each person’s willingness to pay to get total
demand.
The efficient amount of public good to be provided is determined given the marginal cost of
producing the public good and the marginal benefit to the people (the sum of each individual’s
marginal benefits).
Example: Suppose we have two individuals with the following demand for a park in terms of acres:
P1=200-10Q (=MB1)
P2=100-10Q (=MB2)
