Ecc3600 lecture 7 notes PDF

Preview

Summary

Lecture 7 slides PDF files ecc3600 econ...

Description

ECC3600 S1 2020 – Lecture Notes Klaus Abbink Lecture 7. Public good experiments Tables and figures are sourced from the articles described in the text, or from my own records if the studies reported are my own.

What is a public good? In economics we distinguish between private and public goods. Public goods are characterised by two criteria.  

Non-rivalry Non-excludability

Non-rivalry means that one individual’s consumption of the good does not affect other individuals’ consumption. Non-excludability means that no-one can be excluded from consuming the good. With private goods there is a rivalrous relationship between consumers. The hamburger you eat cannot be eaten by somebody else. The burger shop can easily exclude you from consuming the hamburger by not selling you one. With a public good this is different. The classical example is national defence. Whether you want it or not, the armed forces will defend you, even if you are a pacifist and don’t want to be defended. So the benefits of defence are non-excludable. There is also no rivalry between consumers. You benefit from being protected no matter whether an additional citizen moves into the country. There is often not a clear-cut dividing line between private and public goods. For example, an empty road satisfies non-rivalry, but once a road is congested this property disappears. It is still nonexcludable, provided that the costs of collecting tolls are prohibitive. The showing of a theatre play is non-rival until full capacity is reached. It is, however, always excludable, since access can easily be restricted to ticket-holders. Non-rival goods with capacity limits are also called club goods, but these are not subject to this unit.

Excludable Non-excludable

Rival Pizza Congested road

Non-rival Empty train National defence

In the economic sense public goods are not goods that are provided by the public sector. This is simply irrelevant. For example, in many countries healthcare is provided by the state. This does not make it a public good. Your visit to the doctor rivals someone else’s, and the doctor can easily exclude you from treatment. It is a political decision that everybody should have equal access to healthcare, and therefore it should be provided by the public sector for free. Public goods pose the problem of how to fund them. Non-rivalry and non-excludability create a freerider problem. If you cannot be excluded from consuming the good, why pay for it? The market mechanism relies on sellers being able to exclude consumers.

1

The Voluntary Contribution Mechanism (VCM) The (linear) VCM is one of the standard games in experimental economics. There are n players (typically there are smaller groups of three to five players). Each player has an endowment e. Players decide simultaneously how much of their endowment to invest in a public good (x), and how much to keep for themselves (e-x). All invested amounts are multiplied by a factor m and redistributed equally among all players. The term m/n is also called the marginal per capita return (MPCR). To make it a public good game, 1...