McPeak

Lecture 13=

PPA 723-F03

P= ublic Goods.

Go back to the idea o= f goods being categorized by: rivalry= and exclusion.

	Exclusion	No Exclusion
Rivalry<= /span>	Private Good	Open Access
No Rivalry	Club Good	Public Good

Private good – = candy bar.

Open access good R= 11; fish in the ocean.

C= lub good – concert, movie, country club.

Public good - national defense, clean air, city park.=

A commodity or servic= e for which the consumption by one person does not preclude others from consuming= the commodity or service, and for which it is not feasible to exclude any one individual from access to this commodity or service.

Provision of a public= good creates positive externalities. The value of the benefits is not reflected in a market.

It does help some to = think through the supply and demand for a public good.

The social demand cur= ve for a public good is derived by the vertical summation of the individual consumers’ willingness to pay for the good in question for all consum= ers.

Recall that a private= good had the horizontal summation for each consumer.

For a price of $2, I = want 3 Whoppers, you want 1, a total of 4 is demanded.<= span style=3D'mso-spacerun:yes'> You and I are the only people, and= if one of us consumes it, the other can not.

Now consider a public= good.

The free rider proble= m leads to underprovision of public goods.

There is an incentive= to benefit from a positive externality without paying the cost of public good provision. =

There are two stores = side by side, but one entrance to the two stores.&= nbsp; Each store is deciding whether to hire a guard to sit by the main door. Two guards are no more effective than one guard.

Costs $10 to hire, Be= nefit of a guard at the main door is $8 to each store. Baseline is no guard, no benefits = (0).

	Hire	Don’t hire
Hire	-2 -2=	-2 8
Don’t Hire	8 -2	0 0

Say we consider coope= rating and splitting the cost.

Costs $10 to hire, Be= nefit is $8 to each store.

	Hire	Don’t hire
Hire	3 3	-2 8
Don’t Hire	8 -2	0 0

Still don’t hir= e.

Show on graph. The societal demand curve is arriv= ed at by vertical summation by all who will benefit from the public good.

Ways to deal with the= free rider problem.

1)&n= bsp; Social pres= sure.

2)&n= bsp; Mergers

3)&n= bsp; Privatizati= on

4)&n= bsp; Compulsory provision

V= oting and public goods.

Finding everyone̵= 7;s valuation is difficult if not impossible.

Even if you knew, pra= ctical issues arise about charging different people different rates.

Usually, we end up ch= arging a uniform rate.

M= edian voter theorem. A project will pass if the median voter’s valuation is greater than the cost to that voter.<= /span>

Project is a traffic light. Total cost of light installation is $300. There a= re 3 voters here who get benefits and pay the costs. Assume they split the costs evenly= , so each one pays $100 per light installed.

Three corners are bei= ng voted on, and the following represents the voters WTP.

	Fred	Barney	Wilma
Corner A=	50	100	150
Corner B=	50	75	250
Corner C=	50	100	110

Corner A has a total = WTP of 300

Corner B has a total = WTP of 375

Corner C has a total = WTP of 260

Which ones will pass = if we vote and people vote yes if their WTP-cost is greater than or equal to zero= ?

Yes – no voting= ignores intensity of preferences.

If the valuation of t= he median voter is greater than the cost to that voter, it will pass a vote wi= th a majority.
How do we figure out WTP for public goods?

S= ome Methods.

= 1)&n= bsp; Hedonic Methods.

Information on public= good demand is embedded in price and consumption levels for private goods.

Consider the case of environmental quality. It is = a implicit characteristics of a good you can buy in the private market.

We can disaggregate t= he observed selling price into its component parts.

We need to have some = measure of the public good in question along with observed selling prices and obser= ved characteristics of the commodity sold.

Price is a function of characteristics.

House purchaser maxim= izes utility subject to a budget constraint by selecting a house with a given se= t of characteristics and price.

Examples:

Houses next to parks. <= o:p>

Houses next to sewage treatment plants.

The debate over SU putting up fences and lights = in the Hookway tract.

Case One: Lakefront footage requirement on northern lakes in Wisconsin.

The county extension agent came to us with a question. Counties in northern WI were consi= dering raising the minimum frontage requirement from 100 feet to 200 feet. There was debate about whether thi= s was a good thing or a bad thing.

Externalities from zoning:

1)&n= bsp; Positive externality. You look across = the lake and see fewer houses. If= part of you enjoyment of you lakefront house is some kind of wilderness view, th= is helps you. “Amenity effect”

2)&n= bsp; Negative externality. You can’t develop your property in the way you could before the law changed. The value of your property in development has been reduced. “Development effect”

What is the net impac= t?

8= 92 transactions for undeveloped properties between January 1986 and December 1= 995. <= o:p>

· The amenity effect is significant and positive.

· The develop= ment effect is not significant (but is negative).

· The 200 foo= t rule increases property values by $15.82 per foot (12.3%).

· Also, an in= crease in the percent of lakefront that is held as public lands significantly increases the value of a property.

Case Two: Permits to Graze on Public Lands i= n New Mexico.=

Ranchers are allowed to graze on BLM, Forest Service, and New Mexico State land.

Permits are not bought or sold. They = have no explicit price. They are transferred to the purchaser of a ranch when the ranch is sold.<= /span>

A policy goal is to charge fair market value for the use of public lands. There is a grazing fee associated = with the use of a permit. Fair mar= ket value in this case would be to set the fee so that there is no value to a permit (positive or negative).

Permits are in terms of animal unit months.

452 ranch sales between January 1979 and December 1988.

Regress price on characteristics (including permit).

Implicit value of a permit is significantly different (larger) than zero in five out= of 10 years for BLM permits, 8 out of 10 years for forest service permits, and= 7 out of 10 years for state permits.

Also, by investigating how permit value changes in response to grazing fees, we f= ind that if fees increase, permit value decreases.

= 2)&n= bsp; Travel Cost methods.

If there is a site specific public good, you can look at the implicit cost of travel to the site as an implicit price of access to the site.

The individual’s utility depends on the total time spent at the site, the quality of the site, the individual’s opportunity cost of time, and o= ther “stuff”. The indi= vidual maximizes utility subject to monetary and time constraints.

Case One: Lake Michig= an Anglers.

97 anglers followed from May to September 1996 and 1997. We called every two weeks and reco= rded trip information. At the end = of the study, we collected background demographic information including their inco= me levels.

Mostly Milwaukee-Racine area anglers.

Estimated seasonal value of fishing: $5= 00 to $700 dollars.

Current catch rates are on the order of ½ to 2 fish per hour (depending on t= he day / season / year).

What is the expected benefit of increasing this rate by 1 fish per hour?

Findings suggest somewhere in the $1000-$2000 range.

Most of the fish these people are fishing for are raised in hatcheries.

What is the amount that should be spent on providing the public good of swimming “easter eggs” so that a higher rate= per hour catch is possible?

= 3)&n= bsp; Private expenditures on a substitute in the abse= nce of a public good.

Not as common in the literature, but interesting results can be obtained.<= /o:p>

The question here is how much do people pay privately in the absence of public = good expenditure?

We each hire private security firms in the absence of public security.

We buy bottled water in the absence of a clean municipal water supply – = or – how much do we spend per year boiling municipal water since it is n= ot safe to drink unboiled.

We buy kerosene to fuel our lamps since there is no electricity.

Can you provide a public good that substitutes for what people are already payi= ng for at a lower price than they are currently paying?

= 4)&n= bsp; Contingent Valuation.

Used to estimate values for environmental amenit= ies and other non-market goods and services.

Surveys are designed to elicit monetary values for non-market goods contingent upon creation of a market or other means of payment.

The transactions are hypothetical.

What are you willing to pay for a specified change (or to prevent a specified ch= ange from happening)? The response= is a direct measure of the individual’s valuation of the non-market good or service.

Case One: Nonpoint Source Pollution and Present Values. Lake Mendota= .

Wisconsin DNR is worr= ied about phosphorus loading in Lake Mendota. The biomass in the lake responds to phosphorus through sudden and massive algal blooms. These stink, are ugly, and take a = lot of work to clean up. Also, there= is an environmental impact through decreased dissolved oxygen content of the lake, harming fish species and plant species in the lake.

Runoff from dairy farms.

Runoff from crop fields.

Runoff from yards and golf courses.

Increased pavement increasing runoff.

Proposal: a program to reduce the number of = blooms in the summer from one out of every two days to one out of every five days. The proposal outlined specific measures that would reduce phosphorus runoff.

Spectrum of choices: = Would you vote yes or not if it cost $0, yes or no if $5, yes or no if $10,…over $300 each year for each of the next three years.

Mean willingness to p= ay is $353 per year.

Case Two: Willingness to pay for wind power.=

Madison Gas and Elect= ric was considering implementing a wind power program. They were going to build some windmills. If you signed up, = you would voluntarily pay more to help meet the costs of the windmill, and decr= ease the use of coal to generate electricity.

We took this opportun= ity to compare actual willingness to pay with hypothetical willingness to pay.

We told one sub-sampl= e they could sign up for $24 per year, another at $48 per year= ,…up to $288 per year. They said y= es or no. The hypothetical group ha= d the same intervals, but it was phrased “if we were to offer this, and it would cost you __, would you agree to pay, yes or no”

How many actually sig= ned up? 24%.

How many said they wo= uld hypothetically? 43%

How much did people s= ign up to purchase on average? $59.

How much did they agr= ee in the hypothetical case to purchase on average? $101.

We asked a follow up = question about how certain they were about their answer in the hypothetical case. For those who were more certain, t= he actual and the hypothetical converged.&nbs= p;