Chapter 30  Public Goods Help When Markets Fail

I. Private and Public Goods
II. Externalities
III. Cost-Benefit Analysis and Government Regulation  

I. Private and Public Goods
A. Private good
        1. Rivalries- only those who will to buy a good can have the
        2. Exclusive- bought by person A, not available to person B
        3. Private goods satisfies an individual want while public good
            satisfies a collective wants.
    B. Public good is a good that is non-rivalrous and non-excludable
    C. Public Choice by W. F. Shughart II of the Library of
         Economics and Liberty
The Predator State Video Part 1 and Part 2 discusses
         public goods. 1/14
     E. Demand for public goods
   1. Demand for public goods is difficult to determine. 
     a. Once provided, everyone may use them. 
    b. The absence of a price mechanism to provide the
                  rationing function 
                  means politicians must decide which goods to produce.
         2. Determining which goods to produce using cost-benefit
             analysis is difficult.
. Many costs (MC) are difficult to predict and measure.
             b. Many benefits (MB) are subjective and difficult to
         3. Public-choice-theory-and-the-politics-of-instant-gratification
             9/16/12 econintersect
         4. Our Mismeasured Economy
Cost  Benefit Analysis compare marginal cost 
         with marginal benefit.
from Thayer Watkins of San Jose State

Many Agree With This Very Old Statement! 


Comedian Groucho Marx


 II. Externalities
          A. Externalities are costs or benefits not accounted for in the price of a product
            that accrue to those outside or external to the market place.
        B. Please review Part IV of  6) Government's Economic Functions for an 
            analysis of government action to decrease externality costs and increase
            externality benefits
       C. Econ Concepts in 60 Seconds Video on Negative Externalities (Spillover Costs)
       D. Coase's Theorem
           1. Analysis by Ronald Coase revealed that government should not get involved
               with disputes over externality costs when property ownership is well-defined
               and the number of people involved is small. 
          2. He demonstrated that individual maximizing behavior would correct these problems. 
          3. The government should only be involved when the number of participants is so large
              as to make bargaining costs prohibitive.
          4. For example, the government should not get involved in a noise pollution problem
              near an amusement park because of the small number of people involved but 
              should get involved with acid rain generated in the Midwest and falling into New
              England because of the large number of people involved.
          5. Read The World According to Coase, Illustration of the Coase Theorem 
              for more information and
              Orange Blossom Special: Externalities and the Coase Theorem
              how Ronald Coase demolished current libertarian ideas about property
  6. Coase theorem - from Wikipedia has additional information.
    E. Solving the pollution problem Orange Blossom Special: Externalities and the 
         Coase Theorem
         1. The market solution
             a. First, taking into account diminishing returns, calculate the economically
                 tolerable level of pollution acceptable to society. This can be done by 
                 comparing the marginal costs to society of  pollution (supply), which 
                 increases with more anti-pollution spending, with the marginal gain to
                 society of a clean environment (demand), which decreases with
                 additional spending.
              b. The resulting quantity of acceptable pollution would be fixed and sold 
                  as "rights" to pollute.
              c. Industrialization causes an increase in the demand to pollute and with a
                  fixed supply, the costs of rights to pollute would increase.
              d. Those who want goods that pollute would simply have to pay!


MCS is marginal cost to society

MGS is marginal gain to society

MRPP is marginal revenue product of pollution



                2. Other solutions
               a. Taxes and subsidies
               b. Regulation
               c. Moral suasion         
                       3. For more insight into tradable rights read
              Trading the Earth, the politics behind tradable
              pollution rights by Sharon Beder.

       F. Using liability rules and lawsuits to eliminate
         externality costs.
         1. Laws and a damage recovery system exist.
         2. Cost, time delays and uncertainty as to outcome hamper this method.

VI. Democracy and economic efficiency
A. Majority rule is often inefficient
           1. A slight majority of people may vote less public spending in an area
               because their perceived benefit is slightly below the good's average
               cost they would pay as a taxpayer.
           2. Those voting for the activity (the minority) would receive a benefit
               substantially greater than the average costs. 
           3. As a result society does not invest in something with a positive total return. 
           4. An example would be people who feel spending on education is not 
               beneficial and vote for less spending in spite of the substantial benefit 
               received by children. 
           5. The public good is voted less money even though total benefit exceeds
               total cost.
       B. Rent-seekers are people attempting to use public policy to secure economic
           rent for themselves at the expense of consumer surplus and in some cases,
           the public interest.


SC is surplus going to consumers 

SL is surplus lost

SR is surplus going to rent-seekers

Economics AP Reviews from


        C. Special interest groups are composed of a few people with much to gain 
          from a political outcome. 
         1. Through political efforts they foster desired results at the expense of the 
              many who acquiesce because individually they have little to lose. 
          2. These groups often form Political Action Committees (PACs) to lobby
              on their behalf.
Logrolling - wiki is trading votes and influence for projects which are not
           of interest in return for votes and influence for projects which are of interest
      E. No Country for Young People examines wage policies affect on younger workers.

III. Cost-Benefit Analysis and Government Regulation  


Annual Deaths Per 100,000 Exposed

Cost Per Life Saved

  Read Grandfather Government Regulation Cost Report - by MWHodges for a conservative view. Liberal view is hard to find.

Mandatory seat belts



Prohibit alcohol and drug use by railroad workers



Control and disposal standards for benzene



Disposal standards for uranium waste



Restrictions on worker exposure to asbestos



.1"Bringing Reason To Regulation," Louis S. Richman, Fortune, October 19, 1992


IV. Sundry Materials
Everyone Is On Welfare
Boondoggle name given to government project during early in FDR's presidency
         to describe wasteful government projects.
     B. Outsourcing State and Local Government Services is  About Looting  1/6/14
C. Improving Public Policy Through Behavioral Economics 
NYU Podcast


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