welcome back and we're gonna talk about public goods now so it turns out the free market does a good job with these private goods the reason being is you know we have this rival risk goods you know like when you purchase it you do it to get your benefit your no one else gets to use it no that's how rivals goods work uh and so you know you can really just decide whether it's worth it for you to buy it it's not excludable right so you only get if you pay for it so you just have this sort of easy calculus where like is it worth me purchasing is it is it worth the amount of money that is on that price tag that's worth that I buy it if it's not I don't okay with public goods the the free market doesn't do such a good job and here's why let's tell let's take the lighthouse story and then if you've heard listen the podcast already you've already heard this so they're expensive to build their lighthouses are expensive in so in a free market who's paying that money who is paying to get that lighthouse built okay is there really a profit motive to build a lighthouse there non-excludable so you can't charge someone for using that light so how do you make profit off the lighthouse and like that's what the free market requires it has to be worth it for you to do it to do something so maybe I think okay captains who use let you know a particular dangerous port or the companies who own those chips maybe they'd all pitch in to build a lighthouse because they're the ones who receive the benefit okay that might sound like it works in theory but then you run into what's called the free rider problem the free rider problem is something occurs with public goods since they're not excludable you can't stop anyone who did not contribute to enjoy it from enjoying it from using the benefit so a rational consumer who's confident the public good has been be provided with or without their personal composition contribution may not contribute sorry contrib contribute so it is being is that okay we think these captains and these ship owners are gonna are gonna pitch in and you're a captain you're like really looks like everyone else is pitching in so this lighthouse is gonna be there so if I don't pitch in I get the lighthouse and I get to save money okay that's the free-rider problem people want the benefit of the good they don't wanna pay for it so we reuse game theory just to sort of understand what's going on here so I know you thought you were done with this after all family but now this will be the one example we do Rachel and Samuel Samuel are considering contributing to a public park project okay so just the two of them it's a very small community just these two people they can choose to contribute either $400 or $0 that's their choice we're gonna simplify as saying it's a binary choice you contribute $400 or you contribute $0 your choice for every four hundred dollars in total contributed each is gonna receive three hundred dollars worth of benefit that makes sense so like yeah you benefit from the park you have to pay for the park so if they both been contribute they both put the four hundred dollars in the pot part left in the pot there's eight hundred dollars in the pot and they each hits six hundred dollars worth of benefit remembers three hundred dollars per you know four hundred dollars contributed so if eight hundred total gets contributed they each receive the individual benefit of six hundred dollars if neither one contributes and neither receives any benefit but if one contributes and the other does not then the park gets four hundred dollars in and they each gets three hundred dollars worth of benefit okay so let's draw our matrix to see what the net benefit is okay so this isn't black we'll be saying those decisions and red will be Rachel's decision if they both contribute again the benefit is so the eight hundred dollars in the pot six hundred dollars is the benefit each get so you get six hundred dollars and benefit but they had to put four hundred dollars in the pot so that net benefit is two hundred dollars for each of them neither contribute okay that's easy zero dollars and these are the interesting ones okay if Samuel does not contribute but Rachel does so that means Rachel gives $400 Sam no gives zero dollars that means there's 400 hours in the pot that each gets three hundred dollars worth of benefit Rachel gets her $300 with a benefit but she put in four hundred so she actually gets a net benefit of negative 100 Samuel on the other hand gets that three hundred with the benefit he didn't put anything in so his net benefit is 300 okay so you can probably see what's going on here it's a prisoner's dilemma okay so let's just remember how we look at these prisoners dilemmas all right let's think about Rachel first if she thinks Sam is gonna contribute then her choices contribute as well and get $200 of net benefit or don't contribute any at 300 hours with a net benefit so Samuel contributes Rachel should not contribute if Samuel is not going to contribute then Rachel can say all right neither will I and get zero dollars of benefit or she can choose to contribute it be the sucker and get $100 give 100 hours of benefit well if Samuel doesn't attribute then neither should Rachel so that sums it up if Samuel contributes Rachel should not contribute if Samuel doesn't contribute Rachel should not contribute so Rachel's dominant strategy is to not not contribute and same thing here for Samuel she thinks Rachel's gonna not contribute that he's gonna choose negative 100 or zero I'm not gonna contribute either if he needs rachel is gonna contribute it he's thinking at 200 300 I'm not gonna contribute so the incentive to freeride is too strong and so this predicts the Nash equilibrium is that we get land up here neither person contributes we get no park when clearly they both be better off if the park could happen and if you don't like you might think okay this doesn't make sense Rachel and Samuel would find a way to agree that actually talk to each other okay that's true I agree in a in a situation was only two people they probably get together and just make a deal this isn't like oligopoly where it's illegal to collude you could both agree to contribute to this park but think about it once we have a hundred people or a thousand people or whole country how many people would claim the park is not worth their money but still enjoy the benefits if someone's going door-to-door around the neighborhood and like it's not a scam it's up on the up-and-up and is trying to get money contributed to do something good for the community you know build some-some playground you know pitch in 20 bucks if everyone here pitches in $20 we can get this beautiful play down how many people would say forget about it I'm saying I have kids that play gonna be worth it for me but I have my choices get a playground for free or get a playground for $20 a rational person says get that playground for free right so the solution here is simple the government should provide public goods by taxing and using government government revenue on public goods then you actually get this efficient outcome that that you know if someone just tax Rachel and Samuel and built the park they'd both be happy right they'd be better off than if that did if they tried to do this voluntarily that's the truth about public goods the free market under provides public goods there's a not enough public goods under the free market because this free rider problem so if something is a public good then it's best for the government to provide it this is one example where this is a market failure so even in and so the government has this tools to intervene and I think even the most staunch libertarians believe that true public goods are things that should be provided by the by the government as long as the overall social benefit the amount the entire community is going to benefit from a public good I know is stronger than the the cost okay so here's just another example for the free rider problems another way to think about the free rider problem that I like to include you're not going to find this in the book but there's gonna be in a question on the assignment number three that's really similar to this okay so you have these roommates Moritz and milk viewer and they're deciding whether they should upgrade their DirecTV package to include HBO so they have DirecTV the Gulf have access to it but they have the average opportunity to add his additional services it morphs his friends won't shut up about how great West's world is it's back now right so he really wants to add HBO so his willingness to pay for HBO is $40 per month Melchior watch his Game of Thrones but he thinks it's gone downhill in the last few seasons and if you disagree with that you're it has definitely gone down oh sorry sorry I you still loved that show but I think it is it's become almost unwatchable so someone right enough someone out there is listening this and wants to fight me over that statement email me bring it on I'll explain why I think it's bad so while he would like HBO he's only willing to pay say $20 a month and let's say DirecTV charges $25 per month for HBO okay so again $25 per month that's how much HBO cost Melchior is willing to pay $20 per month mort's is willing to pay $40 per month okay first of all why is HBO public good in this scenario okay remember the two definitions of public goods nonexcludable and nonrival risk and so it's you know the HBO is non rival wrist you know if Moritz decides he wants HBO that's not gonna stop milky or for me I'm gonna watch it and it's not excludable like they both have access they both have cable boxes that both have remote controls so you can't really say like you know Melchior can't really say I paid for this you didn't so don't you dare watch HBO right it doesn't really make sense they're amazed all right so what's the total willingness to pay for HBO well if Moritz said he was willing to pay $40 and Belk your city was willing to pay 25 the total willingness to pay is $65 so is it efficient for the roommates to get HBO well absolutely if they are willing as a whole as a group to pay $65 and only cost $25 they should absolutely order it this is well within what they're willing to pay okay so I'm beforeand going on these questions here's just a quick thought process how would you there's no right answer here how would you split this up Moritz is more willing to pay he's want to pay more he wants HBO more than Melchior does but the roommates should split it 50/50 since more someone who really really wants it and Melchor just kind of once it should you pay more like there's no right answer here but the you might think no of course do they give them the same things should be 50/50 but then Morris gets more benefit than Melchior is that really fair right when we of benefit is sort of like consumer surplus mort's will get more is that fair right it says it's not like the most obvious concept but with those things in mind let's think about if there is incentive for either of them to lie about how much they want it want it okay so is there incentive from Moritz to lie he is willing to pay $40 Melkor is willing to pay 20 what if the more it said it's yeah I guess I could go for HBO I kind of wanna watch this West world show i-i'll pay five dollars maybe ten but that's all I'm willing to pay if you need me to pay more than that I'm not gonna go and I'm not gonna go in right this is free writing she's saying I'm only willing to pay five bucks and more it's member Moritz was willing to pay twenty it's worth 25 all right you pay five I pay twenty done and milk yours and they're laughing sorry I can I have trouble trouble for remember who's who more it's a sitting there laughing because he lied he knows how much is willing to pay but now he got away and got HBO for five bucks awesome the opposite is their ad set for milk here to Wyatt of course Moritz is one pay $40 if milker says you know what HBO sucks I don't like this show or I like that channel I don't want to pay I don't care I don't want the channel let's not do it well Morris was willing to pay $40 it only cost 25 he's gonna do it on his own and guess what Morris gets free milk here gets free HBO sorry I really these these these names I really confused myself and so explain how the free rider problem can lead to the pair of programs missing out on this quality premium programming um well they both have incentive to lie and let's imagine like there's no there's why they're kind of sticking to it more it said I'm willing to pay five bucks more so I'm not willing to pay at all all right that's not worth it upgrade right that's what that's what would happen I'm so there is there's RIT that's how the free rider problem works if people don't want to pay the full amount so they sort of downgrade how much they want something that thing may never come okay so email maybe you have any questions if not this chapter quiz is due on Sunday I will talk to you later