Chapter 30  Public Goods Help When Markets Fail

Updated 10/18/16       Pease        
I. Private and Public Goods       II. Externalities      III. Democracy and Economic Efficiency      IV. 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 benefit
        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
    D. 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.
             a. Many costs (MC) are difficult to predict and measure.
             b. Many benefits (MB) are subjective and difficult to measure.
         3. Public-choice-theory-and-the-politics-of-instant-gratification
             9/16/12 econintersect
         4. Our Mismeasured Economy
      E. Cost  Benefit Analysis compare marginal cost with marginal benefit. from Thayer Watkins of San Jose State
     F. Eisenhower was right,  the military industrial complex poses a real threat

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
          6. Coase theorem - from Wikipedia has additional information.
     E. Solving the pollution problem Orange Blossom Special: Externalities and 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!
          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.

history-of-us-taxes

MCS is marginal cost to society

MGS is marginal gain to society

MRPP is marginal revenue product of pollution

               Measures of Pollution

Pollution from economic activity

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 (Sr)  for themselves at the expense of consumer surplus (Sc) received
         in the marketplace and in some cases, the public interest.

 Image result for majority rule cartoons

 

SC is surplus going to consumers 

SL is surplus lost

SR is surplus going to rent-seeker

 

 

 

 

 		 
    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 - 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.
     F. Trump vs. the Regulatory State Robert Samuelson, Washington Post

IV. Cost-Benefit Analysis and Government Regulation  

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

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

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

 

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