In previous lectures we looked at the design of mechanisms to allocate public and private goods in “small markets.”  In both cases we saw that incentive compatibility is a basic friction preventing efficiency.  But in the case of private goods we saw how that friction vanishes in larger markets.  In this lecture we show that the opposite occurs for public goods.  The inefficiency only gets worse as the size of the population served by a public good grows larger.  We are capturing the foundations of the free-rider problem.  This is another set of notes that I am particularly proud of becuase here is a completely elementary and graphical proof of a dominant-strategy version of the Mailath-Postlewaite theorem.

The conclusion we draw from this lecture is that the idea of “competition” that restored efficiency in markets for private goods cannot be harnessed for public goods and therefore some non-voluntary institution is necessary to provide these.  This gives an opportunity to have an informal discussion of the kinds of public goods that are provided by governments and the way in which government provision circumvents the constraints in the mechanism design problem (coercive taxation.)  The possibility of providing public goods by such means comes at the expense of losing the ability to aggregate information about the efficient level of the public good.

Here are the slides.