Microeconomics - Game Theory & Public goods !
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Public goods |
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- Goods that are not excludable and are non rival are called public goods; other examples are police and fire protection, highways, national defense, lighthouses, television and radio broadcasts, clean air, and so on.
- Private provision of a discrete public good: we cannot expect that purely independent decisions will necessarily result in an efficient amount of the public good being provided. In general it will be necessary to use more complicated mechanisms.
- Voting for a discrete public good: The amount of a public good is often determined by voting. A voting equilibrium is an amount such that there is no majority that prefers either more or less of the public good
- Efficient provision of a continuous public good: The condition for efficiency in the case of continuous provision of the public good is that the sum of the marginal willingness’s-to-pay equals the argental cost of provision. In this case the marginal cost is 1 since the public good is simply the sum of the contributions.
- Demand revealing mechanisms: Private provision of public goods generally results in less than an efficient amount of the public good. Voting may result in too much or too little of the public good. One mechanism that we might use is simply to ask each agent to report his or her net value and provide the public good if the sum of these reported values is nonnegative. The trouble with such a scheme is that it does not provide good incentives for the individual agents to reveal their true willingness to pay.
- Demand revealing mechanism with a continuous good: The demand revealing mechanism was introduced by Clarke (1971) and Groves (1973).
When the actions of one agent directly affect the environment of another agent, we will say that there is an externality. In a consumption externality the utility of one consumer is directly affected by the actions of another consumer. In production externality the production set of one firm is directly affected by the actions of another agent.
Game theory is the study of interacting decision makers. In Economics we usually study the theory of optimal decision making by a single agent-a firm or a consumer-in very simple environments. The strategic interactions of the agents were not very complicated. But Game Theory lay the foundations for a deeper analysis of the behavior of economic agents in more complex environments.
Game theory has been widely used in economics in the last decade, and much progress has been made in clarifying the nature of strategic interaction in economic models. Indeed, most economic behavior can be viewed as special cases of game theory, and a sound understanding of game theory is a necessary component of any economist's set of analytical tools.
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