Question

Diane’s Diamond Depot and Sean’s Sock Shop are the only two stores in a small shopping center sharing a

parking lot. The owner’s are considering hiring a shared overnight security guard to patrol the parking lot.

Assume the presence of a security guard in the parking lot will deter criminal activity to either store.

Diane has very valuable inventory, and is very afraid of a break-in so she is willing to pay $700 per week

for a security guard. Sean doesn’t have as valuable of inventory, but is still concerned with break-ins or

vandalism and is willing to pay $300 per week for a security guard.

The cost to hire a security guard to patrol the lot is $800 per week.

(a) Explain why the security guard can be considered a public good when we are only considering the two

store owners as the economy. Your answer should include the two characteristics of public goods.

Answer 1

The security guard can be considered a public because of two primary reasons-

Nonexcludable - Since there is one common parking lot, when the security guard is hired, he protects the parking lot. None of their shops can be excluded from the protection. One of the primary characteristics of any public good is that they are non excludable in nature, meaning it is not possible for one user to exclude the other user from using a public good. For e.g. if a street lamp is constructed and some people in the locality do not pay taxes, yet no tax payer can exclude anybody from benefitting from the street light.

Non rivalry - Well, when the security guard is patroling the parking lot, the protection of Diane's Depot does not rival (prevent) the protection of Sean's shop as they share the same parking lot. Non rivalry in consumption is a primary characteristic of a public good.

Also consider that a tax payer pays taxes for a public good depending on how much he values that good. A rich person in society would pay higher taxes for police service as he values a safe and crime free society more than a average person. Likewise here Diane values security more than Sean as she has more valuable inventory and hence is ready to pay lot more for the guard than Sean. This is the defining characteristic here that shows how the security guard is a public good in this economy.