Economics 230B
Theory of Public Goods and Externalities

Ted Bergstrom

Economics Department, UCSB

Welcome to the Economics 230B Website. If you are taking Econ 230B, please check this site regularly. I will use this site for posting announcements about class procedures. I will also occasionally update the syllabus and the class reading list.

[Announcements] [Reading List] [Lecture Notes for Printing]

The main source of reading for this course will be a series of articles. Whenever possible, I will provide links from this website to electronic versions of these papers.  We will not cover all of the
units listed here.  We will select units to cover as the course proceeds.  I will expect you to read the posted readings for the units that we cover.
 As the course progresses, I will also update my lecture notes up on the Web.  
Each lecture includes a series of problems. You will be required to work them and turn them in.   I have no objections to your working together, but I will ask you to  acknowledge any help that you have had. 
We will sometimes discuss the answers in class, and  I will post answers for these problem sets after you have turned in your work.
There will not be formal examinations for this course.  I will, however, require two things:  One is that you  maintain a working "journal" of the articles that you have read.   This is largely for your own benefit.  For each  article, I will ask you to write at least a  brief description of its message.   For a few articles, I would like you to expand on this exercise by adding your own comments, critiques, and/or extensions.  I will ask you to turn in an online version of your journal at the end of the term.   The second requirement will be a research paper that builds on one or more of the topics that we cover during the quarter.   As the quarter proceeds,
 I  will make suggestions of  topics that I think  are likely to lead to interesting research. 

Reading List
 Introduction to Public Goods Theory
 Paul Samuelson, The Pure Theory of Public Expenditures, Review of Economics and Statistics, 36(4): 350-356, 1954

Paul Samuelson, Diagrammatic Exposition of a Theory of Public Expenditure, Review of Economics and Statistics, 37(4):350-356, 1955

Paul Samuelson, Aspects of Public Expenditure Theories, Review of Economics and Statistics, 40(4):332-338, 1958

Erik Lindahl, Just Taxation--A Positive Solution, in Classics in the Theory of Public Finance, edited by R. Musgrave and A. Peacock

Theodore Bergstrom and Richard Cornes, Independence of Allocative Efficiency from Distribution in the Theory of Public Goods, Econometrica, 51(6):1753-1765, 1983

Lectures 1, 2, 3, and 4 from Bergstrom's Lecture Notes on Public Economics

Remarks on Readings in this section

The Lindahl article is a classic, written as a chapter in a book (in German) by the Swedish economist, Lindahl in 1919. It is short, modern in spirit, and a good thing to read. If you want to read more old classic articles by European public finance economists of the early 20th century, you can find them in the book "Classics in the Theory of Public Finance" from which this article is taken. The Samuelson papers are modern classics and everybody who studies public finance should read them.  The Bergstrom-Cornes paper is well-known to your instructor. 

 Externalities and the Coase Theorem
  Ronald Coase The Problem of Social Cost Journal of Law and Economics 3: pages 1-44 1960

 Urs Schweitzer, Externalities and the Coase Theorem: Hypothesis or Result?  Journal of Institutional and Theoretical Economics, 144:245-266, 1988

William Vickrey, Accidents, Tort Law,  Externalities, and Insurance: An Economist's Critique, Law and Contemporary Problems, Vol 33, 1968,
pp 464-487

Garrett Hardin, The tragedy of the Commons, Science, 144:245-266, 1968

Scott Gordon,  The Economic Theory of a Common Property Resource: The Fishery,  Journal of Political Economy, 62:2, 124-142, 1954

Elinor Ostrom,  Governing the Commons, Chapter 3

Theodore Bergstrom, The Uncommon Insight of Elinor Ostrom,
to appear, Scandinavian Journal of Economics, 2010

Harold Demsetz, Toward a Theory of Property Rights, American Economic Review, 57:2, 347-359, 1967

Elinor Ostrom and Edella Schlager  Property-rights regimes and natural resourcesLand Economics,  68:3, 199, 249-262

Theodore Bergstrom, Regulation of Externalities, Journal of Public Economics, 5:131-138, 1976

Richard Schmalensee, et. al., An Interim Evaluation of Sulphur Dioxide Emissions Trading, Journal of Economic Perspectives, 12(3):53-68, 1998

Lectures 5 and 6 from Bergstrom's Lectures on Public Economics

Remarks on Readings in this Section

The Coase article is another classic that every student of public finance should read.  Schweitzer's article presents a fine modern interpretation of Coase's ideas.  Schweizer's piece is also an excellent introduction to mechanism design theory. 

Holdout Problem, Land Assembly, Anticommons
James Buchanan and Yong Yoon,   Symmetric Tragedies: Commons and Anticommons
Journal of Law and Economics, April 2000, vol 43, no 1,  pp 1-13

Michael Heller The Tragedy of the Anticommons: Property in the transition from Marx to markets, Harvard Law Review, 1997, 621-688

Michael Heller, excerpts from The Gridlock Economy

Scott Duke Kominers and Glen Weyl  Concordance Among Holdouts
First part of paper is accessible now.  We will take up remainder after studying the Groves-Clarke mechanism.

Roy Gardner,   Noel Gaston, and Robert Masson, Tolling the Rhine in 1254: Complementary Monopoly Revisited,
working paper August 2002

Zachary Grossman,  Jonathan Pincus, Perry Shapiro A second-best mechanism for land assembly,
working paper, August 2010

Florenz Plassmann and Nicolaus Tideman, 
Efficient Urban Renewal Without Takings:
Two Solutions to the Land Assembly Problem
, working paper March 2007

Peter Cramton and Paul Milgrom, The Lovely but Lonely Vickrey Auction,
chapter in book,  Combinatorial Auctions, by  P. Cramton,  Y. Shoam, and R. Steinberg

Steven Polasky,  David Lewis, Andrew Plantinga,  and  Erik Nelson
Implementing the optimal provision of ecosystem services   in Proceedings of the National Academy of Science  2014, vol 111, no 17, pp 6248-6257

Congestion Externalities
 William Vickrey, Pricing in Urban and Suburban Transport, American Economic Review, 52(2):,1963

William Vickrey, Congestion Theory and Transport Investment, American Economic Review, 59:251-260, 1969

Richard Arnott, Andrew de Palma, and Robin Lindsey, A Structural Model of Peak-Period Congestion: A Traffic Bottleneck with Elastic Demand, American Economic Review 83: pages161-179 1993 

Richard Arnott and Ken Small, The Economics of Traffic Congestion, American Scientist 82: pages 446-455, 1994.

Jam Today, Road Pricing Tomorrow The Economist, December 6, 1997

Eric I Pas and Shari L Principio,  Braess' Paradox: Some New Insights Transportation Research B, Vol 31, No. 3 pp 265-276, 1997

Tim Roughgarden and Eva Tardos,   How Bad is Selfish Routing?
December, 2001

London's Congestion Pricing 
More on London Traffic

Southern California congestion pricing

Hal Varian and Jeffrey Mackie-MasonEconomics of the Internet, 1994 

Public goods theory has a lot to say about new economic problems that have arisen in the "information age." Several related papers and links can be found on Hal Varian's web page.

Remarks on Readings in this Section

I believe that the economics of congestion is a very promising area for further research. Two areas in which there are very important practical applications are traffic congestion and congestion on computer networks. In my opinion neither of these areas has received the attention from economists that is merited by its importance and interest. Both seems to me areas in which economic theory and econometrics are likely to be powerful tools.

Vickrey's papers are full of clever  insights. The papers by Arnott and his coauthors develop these ideas with skill and elegance.

 Introduction to Public Choice Theory and Voting
 H. Bowen, The Interpretation of Voting in the Allocation of Resources, Quarterly Journal of Economics, 58(1):27-48, 1943

John Geanakoplos, Three Brief Proofs of Arrow's Theorem, Cowles Foundation Discussion Paper, June 2001
Jonathan Levin and Barry Nalebuff,  An Introduction to Vote-Counting Schemes, Journal of Economic Perspectives,  9(1): 3-26, 1995

Hugo Sonnenschein, The Economics of Incentives: An Introductory Account, Nancy Schwartz Memorial Lecture, J. L. Kellogg School of Management, Northwestern University, 1983 

Theodore Bergstrom, When Does Majority Rule Supply Public Goods Efficiently? Scandinavian Journal of Economics, 216-226, 1979

H. Payton Young Condorcet's Theory of Voting, American Political Science Review, 82(4) 1988, pp 1231-1244

Timothy Feddersen and Wolfgang Pesendorfer, The Swing Voter's Curse, American Economic Review, 1996, vol 86, pp408-426

Tom Palfrey and Richard McKelvey An Experimental Study of Jury Decision Rule, Cal Tech working paper, 1997 

Andrew Caplin and Barry Nalebuff, On 64%-Majority Rule, Econometrica, Vol. 56, No. 4. (Jul., 1988), pp. 787-814.

Theodore Bergstrom and Robert Goodman, Private Demands for Public Goods,
American Economic Review,  Vol. 63, No. 3. (Jun., 1973), pp. 280-296.

Arye L. Hillman and John Riley,  Politically Contestable Rents and Transfers,  UCLA working paper, September, 1987

Decisions and Elections,  Donald G. Saari, Cambridge University Press, 2001

A good place to look for more discussion  and references on voting theory (and tips on ice-fishing technique and sauna etiquette) is     Don Saari's home page 

 Private Provision of Public Goods

Theodore Bergstrom, Laurence Blume, and Hal Varian, Private Provision of Public Goods, Journal of Public Economics, 29:25-49 1986

James Andreoni and Theodore Bergstrom,  Do government subsidies increase the private supply of public goods?  Public Choice, 1997 (pdf file) (postscript file)

Richard Cornes and Roger Hartley,  Aggregative Public Goods Games.
Journal of Public Economic Theory, March 2007, pp 201-219

James Andreoni  Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving, Economica, June 1990

Wolfgang Buchholz, Richard Cornes,  and Dirk Rubbelke, Potentially Harmful International Cooperation on Global Public Good Provision
Economica, 2014
Jameson Quinn blog.  "Assurance Contracts"

Alex Tabarrok  The private provision of public goods via dominant assurance contracts
Public Choice vol 96, pp 345-362, 1998.

Mark Bagnoli and Bart Lipman, Implementing the Core Through Private ContributionsReview of Economic Studies, October, 1989, pp 583-601

Mark Bagnoli and Michael McKee, Voluntary Contribution Games: Efficient Provision of Public Goods, Economic Inquiry,  April 1991, volume 29, pages 351-366

John Morgan Financing Public Goods by Means of Lotteries Review of Economic Studies,  2000

John Morgan Funding Public Goods with Lotteries: An Experiment Working Paper, 1998

Theodore Bergstrom, Puzzles: Love and Spaghetti, The Opportunity Cost of Virtue, The Journal of Economic Perspectives, Vol. 3, No. 2. (Spring, 1989), pp. 165-173.

Weifeng Liu,  Global Public Goods and Coalition Formation under Matching Mechanisms
unpublished manuscript, Australian National University,  November 2015

Eduardo Ley, On the Private Provision of Public Goods, A Diagrammatic Approach, Investigaciones Economicas,  20(1): 691-704, 1996

Robertas Zubrickas, The provision point mechanism with reward money,
working paper, University of Zurich economics department

John Morgan Corporate Provision of Public Goods
UC Berkeley Working paper

Milton Friedman 

The Social Responsibility of Business is to Increase its Profits

New York Times Magazine, September 13, 1970

Let Me or Let George: Motives of Competing Altruists
Ted Bergstrom, Rod Garratt,  Greg Leo,  2015.

Jim Andreoni's home page Jim Andreoni has written a whole slew of nice papers about charitable giving, theory, empirical work, and experimental work. This is the first place to look if you want to learn more about this subject. 


 Public Goods in the Experimental Laboratory
John Ledyard, Public Goods: A Survey of Experimental Research in Kagel and Roth ed.Handbook of Experimental Economics Princeton University Press. 1993 

James Andreoni and John Miller, Analyzing Choice with Revealed Preference: Is Altruism Rational?, University of Wisconsin working paper, June 1998

James Andreoni and Rachel Croson Partners versus Strangers: The Effect of Random Rematching in Public Goods Experiment, University of Wisconsin working paper, June 1998 

Tom Palfrey and Jeffrey Prisbey, Anomalous Behavior in Public Goods Experiments, How Much and Why?, to appear, American Economic Review

 Public Goods with Distortionary Taxation
 Anthony B. Atkinson and Nicholas Stern. Pigou, taxation, and public goods. Review of Economic Studies 41:119--128, 1974.
 Edward Foster and Hugo Sonnenschein. Price Distortion and Economic Welfare Econometrica 38:281--297, 1970.
 Trout Rader. The Welfare Loss from Price Distortions Econometrica 44:6 1253--1257, 1976.

Theodore Bergstrom. Commentary on Rader and Foster-Sonnenschein in Economics with No Special Technology by Trout Rader, Input-Output Publishing Company pp 179-182

 Public Goods With Exclusion
 Minasian J,Television pricing and the theory of public goods. Journal of Law and Economics 7:71-80,1964.

Paul Samuelson.Public goods and subscription tv: Correction of the record. Journal of Law and Economics 7:81--84, 1964

William Oakland, Public Goods, Perfect Competition, and Underproduction,  Journal of Political Economy, 82(5), 927-939, 1974

Geoffrey Brennan and Cliff Walsh, A Monopoly Model of Public Goods Provision: The Uniform Pricing Case The American Economic Review, 71(1):196-206,1981

Dagobert L. Brito, William H. Oakland, On the Monopolistic Provision of Excludable Public Goods The American Economic Review, 70(4):691-704, 1980

Michael E. Burns and Cliff Walsh, Market Provision of Price-excludable Public Goods: A General Analysis The Journal of Political Economy, 89(1):166-191, 1981

Michael Spence, Monopoly, Quality and RegulationThe Bell Journal of Economics,  6(1) 417-429, 1975

Michele Boldrin and David Levine,  Why Napster is right, web publication

Ted Bergstrom and Carl Bergstrom The costs and benefits of library site licenses to academic journals  Proceedings of the National Academy of Sciences, Jan 20,
2004, pp 897-904

Ted Bergstrom Free Labor for Costly Journals? , Journal of Economic Perspectives ,
Fall 2001

John Bohannon Who's Afraid of Peer Review, Science, October 2013

Carl Bergstrom and Ted Bergstrom Can author-pays journals compete with reader-pays?  Nature 2004


 Benefit-Cost Analysis

Ted Bergstrom,  Benefit-Cost in a Benevolent Society,
American Economic Review, March 2006, vol 96, No. 1,  pp 339-351

Ted Bergstrom, Rod Garratt, Damien Sheehan-Connor
One Chance in a Million: Altruism and the Bone Marrow Registry
UCSB working paper, September 2007

Damien Sheehan Connor,
ife an Death at the CAFE, Predicting the Impact of Fuel Economy Standards on Vehicle Safety
Wesleyan University Working paper, 2012

Mark R. Jacobsen,
Fuel Economy and Safety:The Influences of Vehicle Class and Driver Behavior,
UCSD Working Paper, 2012


Preference Revelation Mechanisms 

Theodore Groves and John Ledyard , Optimal Allocation of Public Goods: A Solution to the Free Rider Problem, Econometrica 45(4):783-809, May, 1977

Yan Chen and Charles Plott, The Groves-Ledyard Mechanism: An Experimental Study of Institutional Design",Journal of Public Economics 59:335-364, 1996

John Ledyard Voting and Efficient Public Good Mechanisms,  Handbook of Political Science, Chapter 27, 2006

Matthew Jackson,  Mechanism Theory,  2003
Lecture Notes

Lecture notes will be updated and improved as the course progresses. My plan is eventually to make them into a book. 

Lecture notes optimized for web-viewing

Lecture 1. An Introduction to Public Goods  pdf file
Answers to Lecture 1 problems

Lecture 2. Private Goods and Public Goods pdf file
Answers to Lecture 2 problems

Lecture 3. Independence of Allocation and Distribution pdf file

Lecture 4.  Lindahl Equilibrium  pdf file

Lecture 5. Externalities   pdf file 
 Notes on the Lazy Housekeepers Problem

Mathematica files for Lazy Housekeeper 
These are "notes in progress" and may be added to.
Here are mathematica files for drawing graphs for this problem.
If you are handy with mathematica graphics, you could no doubt improve these,
both visually and substantively.  I would
welcome suggestions or help in doing so.

Lecture 6. Law'n Economics  pdf file

Lecture 7. Crowding  pdf file 

Lecture 8. Traffic Congestion pdf file

Lecture 9.  Excludable Public Goods  pdf file

Lecture 10 Preference Revelation and the Pivotal Mechanism.  pdf file

Lecture 11 Groves-Clarke and Groves-Ledyard Mechanisms  pdf file
Vickery-Clarke-Groves Problems
VCG Problems with Answers

Lecture on Elinor Ostrom and Tragedy of the Commons
Lecture notes on anti-commons (preliminary) pdf file

Lecture 12  Benefit Cost Analysis pdf file

Lecture on Voting