Question

4. a. Consider the private provision of public good model with H identical consumers. What is the impact on the equilibrium of increasing the population to H+1 by adding another identical consumer? Does this always increase the welfare of the initial H consumers? b. Can the same conclusion be reached if the consumers are not identical?

Answer 1

A good which is equally available for all and no one can be barre from consuming the services of the good, where an individual does not need to pay anything in return for the consumption of that good, and the consumption of the good does not reduce the availability of the good for the others, is called Public Good. Whereas, a good which is excludable, i.e. it is available for only one consumer or a selected group of consumers and an individual need to pay a certain amount of remuneration for consuming the services of the good, and also the consumption of the good reduces the availability of the good for the others, is called Private Good.

                                   If we consider that a public good has been provisioned to be a private good, this means that it will cease to be available to all the consumers. As per the given condition, the private good is available for consumption to H identical consumers. This means, that the H identical consumers will pay an equal amount of money to get the services of the private good. The privatization of a public good does not always increase the welfare of the H consumers, but at times privatization is beneficial to the consumers. This is because, it is possible that a certain public good, which was not maintained was not providing adequate amount of welfare to the consumers. For example, let us suppose that there is a road that connects two busy cities. Roads are usually public goods and are open and free to all. Now, it is possible that due to lack to maintenance, the condition of the road has deteriorated, and it has started to be a risk of life to travel through that road. Moreover, travelling through that road also consumes huge amount of time. Under such circumstances, if privatization of the road is done, and a certain amount of tax is levied upon the users of that particular road, although the consumers will now bear a certain amount of money for travelling through that road, but it will increase the welfare of the consumers at a comparatively greater scale. Thus, we can see that privatization of a public good is at times increases the welfare of the consumers. However, this criterion does not apply to all the public goods. Public goods which are free to the identical consumers, will not increase any welfare if they are privatized.

                                      However, if there is an addition of a non-identical consumer, then, Privatization of a public good has a larger possibility of not increasing the welfare of the non-identical consumers. If we take the case of the above explained example, then, we will realize that, here the H consumers who would want to opt for travelling through that road will, most often than not, be the daily commuters who need to go communicate between the two busy cities. Therefore, for them, there is no alternative to commuting, and for them, under such a condition, the privatization of the good would yield greater welfare. However, if there is a non-identical consumer, for whom, travelling through that road is a rare phenomenon. For this consumer, the privatization of the road will yield lesser welfare, as the consumer may not be ready to pay for a road which he could earlier travel free. Even if the consumer agrees to pay the tax, the utility or welfare to the non-identical consumer will be comparatively lesser that the H identical consumers.