I. 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 are difficult to predict and measure.
       2. Many benefits are subjective and difficult to measure.

II. Accounting for 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 on Chapter 6 for an analysis of government action to decrease externality costs and
          increase externality benefits
     C. 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
            
      D. 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.

III. 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.

IV. 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.

 

 

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