Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

public goods
1
G
2
G
Panel A
Pr ivate
Consumption
Budget
constraint s
Indifference
curves
Consumption of
Public Goods
B
B
E
E
1
G
2
G
B

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Figure 14.5: Individual Demand Curve for Public Goods 
In the above figure the line AB represent the budget 
constraint. On the budget constraint, a fall in government 
expenditure will increase the consumption of private goods. The 
indifference curves show the combination of public goods and 
private goods the individual prefer. The slope of indifference curve 
i.e. marginal rate of substitution which represent the amount of 
private goods the individual is prefer to give up in order to get an 
additional public goods. The slope of the indifference curve is 
diminishing which tells us that individual in order to get more of 
public goods he is prefer to give up less and less of private goods. 
Point E is the individual‘s highest level of utility is attained at the 
point of the tangency between the indifference curve and the 
budget constraint. At point E, the slope of the budget constraint and 
the slope of indifference curve are equal. The slope of the budget 
constraint tells us that how much of private goods the individual 
must give up to get an additional unit of public goods, which equals 
to the individual‘s tax price.
A fall in tax price shift in the budget constraint from BB to BB' 
and the equilibrium point move from point E to E'. The individual‘s 
demand for public goods will generally increase. 
Thus one can derived the demand curve for public goods by 
raising and lowering. Similarly one can derive demand curve for 
private goods.
Panel B plots the demand curve corresponds to panel A. 
Point E and E', from panel A, show the quantity of public goods 
demanded at tax prices p
1
and p
2
. Thus one can trace more points 
for panel B by shifting the budget constraint further in panel A.