Auction of Public Goods
Public goods are defined as goods that are non-excludable and non-rivalrous. Non-excludable good means that its use by one person does not prevent other people from also using it. Non-rivalrous good is good that can be supplied to many people without additional cost; i.e., the good is always available regardless of people’s consumption. An example of a public good is a local park. Many people can use the park at the same time, and the cost to build the park is independent of number of consumers. Since public goods have free access for everyone, it is not in people’s interest to pay for the public goods because they think that other people can buy and they can use them at no cost. In the article “Noble Auction,” the author discusses how auction theory developed by Paul R. Milgrom and Robert B. Wilson can help public and private entities make valuation of a public good and create a competitive market for such public good.
In a usual single round sealed bid auction, there is a phenomenon called the winner’s curse which is the tendency for the winning bid to exceed the value of the good. Due to fear of the winner’s curse, bidders then tend to bid lower than their valuation of the good or not bid at all. However, this outcome is not ideal for the sellers who are usually governments trying to auction public goods such as permits for carbon dioxide emission or spectrum rights. Wilson and Milgrom suggest that the fear of winner’s curse can be mitigated through a multi-round auction in which the bidders can learn some information about other bidder’s valuation at the end of each round. They also suggest a “combinatorial clock auction” in which participants place a bid for a combination of items and different quantities. These different methods can help the government maximize revenue while distributing public goods to private sectors.
Although we learned in class that bidding our valuation of the good is a dominant strategy in sealed bid auction, people do not always choose the dominant strategy due to the lack of information on the true valuation of the good as illustrated by the winner’s curse phenomenon. I also find it interesting that people develop complicated auction theory to maximize benefits for both the sellers and the buyers.
Source:
https://www.epw.in/journal/2021/34/commentary/nobel-auction.html
https://blogs.worldbank.org/climatechange/auctions-winning-bid-nobel-prize-development-and-climate