Lecture Five: Public Finance

PART ONE: THE ECONOMIC BASIS

FOR GOVERNMENT ACTIVITY

Chapter 4: Public Goods

Dr. Yara El-Sehaimy

Ya b d e l k h a l e k @ e c u . e d u . e g
 Chapter 4 Outline
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Market failure types.

How goods are classified?

Public goods.

Free-riding problem.
 MarketMarket
Failure
Failure Types
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Concentrate Asymmetric
Externalities Public Goods
Market Power Information

Lecture 4
Individual Assignment Two
 How Goods are Classified?
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 In order to understand public goods market failure, we need to

understand first how goods are classified.

 We classify goods based on many factors such as:

 Based on income.
 Based on relative goods.
 Based on benefit.
 Based on social gain.
 Rivalry and excludability.

 Let’s understand each type!

How Goods are Classified? –Income-
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Good
Inferior Normal
Consumption Consumption
decreased with increased with
increasing income increasing income

I↑ , C↓ I↑ , C↑
How Goods are Classified? –Relative Good-
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Good

Complementary Substitutes
Price of
Price of
Complementary
Substitute↑ , Qd
good↑ , Qd of the
of the other good↑
other good↓
How Goods are Classified? –Benefit-
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Good

Merit De-Merit

Goods that have Goods that have

positive effect on negative effect on
the consumer the consumer
How Goods are Classified? –Social Gain-
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Positional Good
Good that is consumed to
gain social position
How Goods are Classified? –Rivalry & Excludability-
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Good

If Rival
someone Excludable
consumes the If someone could
good, it will be no be excluded from
longer available consuming a good
for someone else.
My consumption I can’t pay the
affects someone price; so I can’t
else consumption consume it
How Goods are Classified? –Rivalry & Excludability-
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Characteristic
Rival Non-Rival

Excludable

Non-Excludable
How Goods are Classified? –Rivalry & Excludability-
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Characteristic
Rival Non-Rival

Excludable

Non-Excludable
Public Goods
 Public Goods
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 Is a type of goods where we can all consume it freely, without affecting

the consumption of someone else.

 Many of the goods provided by the government are public goods such as
national defense, environmental protection, television, radio, police
services, public education, public health, etc.

 If these goods are supplied in the market it would result in

positive/negative externality; because the individual use for such goods
will provide external benefits/cost to a 3rd party.

 The cost of making such goods available is always taxes!

 Public goods could be excluded through corruption.

How Goods are Classified? –Rivalry & Excludability-
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Characteristic
Rival Non-Rival

Excludable
Private Goods

Non-Excludable
Public Goods
 Private Goods
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 Is a type of goods where a certain group can consume only when is able
to pay the market price.

 Many of the goods provided by the private sector as everything that we

purchase daily and our consumption affect others consumption.

 These goods does not contains externalities; cause they are supplied at
equilibrium and efficiency condition is achieved.

 The cost of making such goods available is always revenues from sales!

 Government could enter the market through its private enterprises and
supply private goods to make profits and increase government
revenues.
How Goods are Classified? –Rivalry & Excludability-
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Characteristic
Rival Non-Rival

Excludable
Private Goods

Non-Excludable
Club Goods Public Goods
 Club Goods
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 Is a type of goods where a certain group can consume until the point of
congestion with the ability to pay its market price.

 Such as roads, clubs, theaters, amusement parks, sporting events

“Public”.

 Increasing number of consumers does not cost the provider anything,

until the capacity is reached, no one could ever use it!

 The cost of making such goods available is always revenues from sales!

 Both the government and the private sector could provide

club/congestion goods.
How Goods are Classified? –Rivalry & Excludability-
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Characteristic
Rival Non-Rival

Excludable Common Resource

Private Goods
Goods

Non-Excludable
Club Goods Public Goods
 Common Resource Goods
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 Is a type of goods with benefits that can be priced.

 Such as private clubs, membership rights, credit hour public education.

 Increasing number of consumers does not cost the provider anything,

until the capacity is reached, no one could ever use it!

 The cost of making such goods available is always revenues from sales
and taxes!

 Both the government and the private sector could provide common
resource goods.
 Then Why?
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Why it is important to understand the type of

the good?
Bonus question 1%
 Free-Rider Problem
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 A free-rider is a person who seeks to enjoy the benefits of a public good

without contributing anything to the cost of it.

 The free-rider problem evolved from the incentive people have to enjoy
the external benefits financed by others, with no additional cost applied
to them.

 There aren’t penalties of free-riding behavior, so why not doing it.

 What makes free-rider strategy succeed is that few people apply it; but
if it turned to be a collective action, all the society will be worse off.
 15 Minutes
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 Let’s talk a bit 

 What do you think about the course so far?

 What is the most thing you like and dislike?

 How we can improve the course? I’m open for constructive criticism.
 Thank You!
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!FIVE LECTURE DOWN SEVEN TO GO!