Editors Notes:
This chapter and chapter 31 are covered in the 16th
chapter of
McConnell Economics Book, 18th edition and the 30th chapter
of the 15th edition.
I. Private versus Public Goods.
A.
Private good
are
1.
Exclusive
- it is reasonably possible to prevent a class of
consumers (e.g. those who have not paid for it) from consuming the good.
2.
Rivalrous - consumptions by one
consumer prevents simultaneous consumption by other consumers. 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
II. Demand for public goods
A. Demand for public goods is difficult
to determine.
1. Once public goods
are provided, everyone may use them.
2. The absence of a price mechanism
to provide the rationing function means politicians must
decide which goods to produce.
B. Determining which goods to produce using
cost-benefit analysis is difficult.
1. Many costs
(MC) are
difficult to predict and measure.
2. Many benefits
(MB)
are subjective and difficult to measure.
III.
Cost Benefit Analysis
compare marginal cost with marginal benefit.
from Thayer Watkins of San Jose
State
IV. 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
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 tradeable pollution rights by Sharon
Beder.
V. Using liability rules and lawsuits to eliminate externality
costs.
A. Laws and a damage recovery
system exist.
B. Cost, time delays and
uncertainty as to outcome hamper this method.
VI.
Government Intervention to affect
externalities is covered in chapter
31) The Economics of
Government Subsidies.
VII. 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
|
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.
D. Logrolling is
trading votes and influence for projects which are not of interest in return for
votes and influence
for projects which are of interest.
VIII. An attempt to apply cost-benefit analysis to government regulation
A.
|
Regulation1 |
Annual Deaths Per 100,000 Exposed
|
Cost Per Life Saved
|
|
Mandatory seat belts
|
9.1 |
$390,000 |
|
Prohibit alcohol and drug use by railroad workers |
.2 |
$650,000 |
|
Control and disposal standards for benzene
|
2.1 |
$4,000,000 |
|
Disposal standards for uranium waste
|
43.0 |
$69,000,000 |
|
Restrictions on worker exposure to asbestos
|
6.7 |
$117,000,000 |
| 1"Bringing
Reason To Regulation," Louis S. Richman, Fortune, October 19,
1992 |
B. Read
Grandfather Government Regulation Cost Report - by MWHodges for a
conservative view. Liberal view is hard to find.