This document discusses the optimal provision of public and private goods. It defines public goods as non-excludable and non-rival, meaning one person's consumption does not reduce availability or prevent another's consumption. Private goods are excludable and rival. The document outlines how to determine the optimal quantity of each good where social marginal benefit equals marginal cost. For public goods, the optimal quantity is where the sum of individual marginal rates of substitution equals the marginal rate of transformation. However, free riders who benefit without paying can cause underprovision of public goods. The document provides an example of beekeeping providing a pollination public good to apple orchards.

1. OPTIMAL PROVISION OF PUBLICAND
PRIVATEGOODS
BY:
BINDU H A

2. Public and Private Goods:
A Public Good is a product that one individual can consume without
reducing its availability to others and from which no one is deprived.
Characteristics:
Non-excludability: once a public good has been provided, the
producer cannot prevent people who have not paid for it from
receiving the benefits
Non-rivalry: one person’s consumption of a public good does not
prevent someone else from consuming it.
Private good is a product where consumption by one individual
prevents another individual from consuming it.
Characteristics:
Excludable
Rival.

3. Categories of goods
Excludable Non Excludable
Rivalrous
Private good
(ice cream, cheese,
cars)
Common resources
(ocean, timber, pasture)
Non-rivalrous
Club goods
(toll roads)
Public good
(National defense)

4. Optimal Provision of Public Goods
G- Quantity of Public good
MB1, MB2, MB3 – Marginal Benefit
curve(demand curve)
∑MBi – Social Marginal Benefit
(SMB) Curve
MC – Marginal Cost incurred by
supplier
G* -optimal quantity of public good
(SMC=SMB)
Wiilingness
to
pay

5. Optimal Provision of Private Goods
Q – Quantity of Private good
DA, DB – Individual demand
curves
D – Social Marginal Benefit
(SMB) curve
S- Supply Curve (SMC)
QT - Optimal quantity of
private good (SMC=SMB)

6. Samuelson rule: optimal provision of public goods

7. ∑ MRSG P = MRTG P

8. Free rider problem
Free rider problem is type of market failure that occurs when
those who benefit from the public goods do not pay for it.
Free riders are those who obtain benefits without paying their
due share.

9. Private Provision of Public Goods

10. Application

11. Example
Q. A beekeeper lives adjacent to the apple orchard. The orchard
owner benefit from bees because each hive pollinates about one
hectare of apple trees. The orchard owner pays nothing for this
service, however, because bees comes to orchard without his
having to do anything. Because there are not enough bees to
pollinate entire orchard, the orchard owner must complete the
pollination by artificial means, at a cost of Rs. 100 per hectare of
trees.
Beekeeping has a marginal cost MC = 100 + 50Q, where Q
is number of beehives. Each hive yields Rs.400 worth of honey.
a. How many beehives will bee keeper maintain?
b. Is this economically efficient number of hives?

12. References
Pindyck, R. S., Rubinfeld, D. L. and Mehta, P.L., 2014, Microeconomics,
Dorling Kindsley Pvt. Ltd, pp: 557-563.
www.nptel.ac.in
www.courses.lumenlearning.com

13. THANK YOU