chapter 16copyright ©2009 by south-western, a division of cengage learning. all rights reserved 1...

Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1

ECON

Designed byAmy McGuire, B-books, Ltd.

McEachern 2008-2009

16

CHAPTERPublic Goods and Public Choice

Micro


Private, Public Goods, and in Between

LO1

1. Private goods– Rival in consumption– Exclusive– Provided by private

sector

2. Public goods– Nonrival in

consumption– Nonexclusive– Provided by

government


Private, Public Goods, and in Between

LO1

3. Natural monopoly– Nonrival but exclusive– With congestion:

private goods– Provided by private

sector or government

4. Open-access good– Rival but nonexclusive– Regulated by

government


Exhibit 1LO1

Categories of Goods


Optimal Provision of Public Goods

LO1

Nonrival in consumption– Once produced: available to all

consumers Market demand curve

– Vertical sum of individual demand curves

– Marginal benefit Efficient level of public good

– Market D curve intersects MC curve


Exhibit 2LO1

Market for Public GoodsBecause public goods, once produced, are available to all in identical amounts, the demand for a public good is the vertical sum of each individual’s demand.

The efficient level :MC of mosquito spraying equals its marginal benefit; at point e, where the marginal cost curve intersects the market demand curve.

The market demand for mosquito spraying (D) is the vertical sum of Maria’s demand, Dm, and Alan’s demand, Da.


Paying for Public Goods

LO1

Tax = marginal valuation– Free-rider problem

• People try to benefit from the public goods without paying for them

– Ability to pay


Public Choice in Representative Democracy

LO2

Public choices– Government decisions

• Public goods• Taxes

Median-voter model– The preference of the

median voter will dominate other choices


Special Interest and Rational Ignorance

LO2

Elected officials: Maximize political support– Special interest rather than – Public interest

• Asymmetry • Voters ‘rational

ignorance’


Distribution of Benefits and Costs

LO2

1. Widespread benefits; widespread costs– Traditional public-goods legislation– Positive impact on economy

• Total benefits > total costs

2. Concentrated benefits; widespread costs– Special-interest legislation– Harms the economy

• Total costs > total benefits– Pork-barrel spending


Distribution of Benefits and Costs

LO2

3. Widespread benefits; concentrated costs– Populist legislation– Beneficiaries: rationally ignorant

4. Concentrated benefits; concentrated costs– Competing-interest legislation– Fierce political battles


Exhibit 3LO2

Categories of Legislation Based on the Distribution of Costs and Benefits


LO2C

ase

Stu

dy

Farm Subsidies The Agricultural Marketing Agreement Act, 1937

Prevent ‘ruinous competition’ One in four Americans: farm Floor prices

2007 One in fifty Americans: farm

$18 billions a year


LO2C

ase

Stu

dy

Farm Subsidies To subsidize farmers, consumers pay

Higher product price For the surplus (taxpayers) For storage (the government buys

the surplus) E.g. milk

Free market p=$1.50 Subsidized p=$2.50+$2.50+

$0.50 Farmers: normal profit


Exhibit 4LO2

Effect of Milk Price Supports

0 75 100 150Millions of gallons

per month

$2.50

1.50

Dol

lars

per

gal

lon

S

D

Excess quantity supplied

No government intervention: market price = $1.50 per gallon, and 100 million gallons are sold per month.

Government: floor price = $2.50 per gallon, quantity supplied increases and the quantity demanded decreases.

To maintain the higher price, the government must buy the excess quantity at $2.50 per gallon.


Rent Seeking

LO2

Activity interest groups undertake – Secure special favors from government

Political action committees Shift resources from production No incentive for economic efficiency


LO2C

ase

Stu

dy

Campaign Finance Reform Special-interest money Soft money Hard money Money matters more to challengers Efforts to limit campaign spending


The Underground Economy

LO3

Unreported market activity– To avoid taxes– Illegal

Tax avoidance– Legal– Pay least possible tax

Tax evasion – Illegal– No or fraudulent tax return


The Underground Economy

LO3

Underground economy grows more– Government regulation increase– Tax rates increase– Government corruption widespread

Estimated: $1.4 trillion in 2007


Bureaucracy in Representative Democracy

LO4

Bureaus– Government departments, agencies

Ownership– Taxpayers

Funding– Government appropriation

Less incentive to eliminate waste and inefficiency



LO4

Bureaucratic objectives– Serve the public– Maximize budget

• Larger budget than desired by median voter



LO4

Private vs. public production– Private production – may be more

efficient– Public production – preferred by

public officials

chapter 16copyright ©2009 by south-western, a division of cengage learning. all rights reserved 1...

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