The Formation of the Prices of Public Goods

Abstract

(1) The laws of price formation on the market are well known: it depends upon the varying quantities of goods and the degree of their final utility for buyers and sellers, the conditions of monopoly and competition, etc.¹ Once established, a market price has this peculiarity that it corresponds not to all the various degrees of final utility which one and the same good may have for the various persons wishing to acquire it, but only to one of these degrees of utility. Let us suppose, for example, that there are seven persons for whom a good has different degrees of final utility: A, B, C, D, E, F and G are willing to pay for a unit of this good 100, 90, 80, 70, 60, 50 and 40 lire respectively. If a price of 70 lire has been established on the market, only A, B, C and D will purchase the good, because its degree of final utility for them equals or exceeds 70; E, F and G, for whom the desired good has a final utility of less than 70, will be debarred from its purchase. But among the persons A, B, C and D who are able to buy, only Dpays a price corresponding to the degree of final utility the good has for the buyer, namely 70; A, B and C, for whom the good has a final utility of 100, 90 and 80 respectively, pay less for the good than its value to them according to the intensity of their need.