27.4 Everyday, Business, and Policy Application: Competitive Local Public and Club Good Production: In exercise 27.3, we considered some ways in which we can differentiate between goods that lie in between the extremes of pure private and pure public goods.

A. Consider the case where there is a (recurring) fixed cost FC to producing the public good y, and the marginal cost of producing the same level of y is increasing in the group size N because of crowding.

a. Consider again a graph with N, the group size, on the horizontal and dollars on the vertical.

Then graph the average and marginal cost of providing a given level of y as N increases.

b. Suppose that the lowest point of the average curve you have drawn occurs at N*, with N*

greater than 1 but significantly less than the population size. If the good is excludable, what would you expect the admissions price to be in long-run competitive equilibrium if firms

(or clubs) that provide the good can freely enter and/or exit?

c. You have so far considered the case of firms producing a given level of y. Suppose next that firms could choose lower levels of y (smaller swimming pools, schools with larger class sizes, etc.) that carry lower recurring fixed costs. If people have different demands for y, what would you expect to happen in equilibrium as firms compete?

d. Suppose instead that the public good is not excludable in the usual sense but rather that it is a good that can be consumed only by those who live within a certain distance of where the good is produced. (Consider, for instance, a public school.) How does the shape of the average cost curve you have drawn determine the optimal community size (where communities provide the public good)?

e. Local communities often use property taxes to finance their public good production. If households of different types are free to buy houses of different size (and value), why might higher income households (that buy larger homes) be worried about lower income households “free riding”?

f. Many communities impose zoning regulations that require houses and land plots to be of some minimum size. Can you explain the motivation for such “exclusionary zoning” in light of the concern over free riding?
g. If local public goods are such that optimal group size is sufficiently small to result in a very competitive environment (in which communities compete for residents), how might the practice of exclusionary zoning result in very homogeneous communities; that is, in communities where households are very similar to one another and live in very similar types of houses?