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Public Goods Help
When Markets Fail chapter 30
A. Private versus Public Goods.
1. Private good are
a. Rivalrous - only those who will to buy a good can have the benefit
b. Exclusive - bought by person A, it is not available to person B
c. Private goods satisfies an individual want while public good satisfies a collective wants.
2. Public good is a good that is non-rivalrous and non-excludable
B. Demand for public goods
1. Demand for public goods is difficult to determine.
2. Once public goods are provided, everyone may use them.
3. The absence of a price mechanism to provide the rationing function means politicians
must decide which goods to produce.
4. Determining which goods to produce using cost-benefit analysis is difficult.
a. Many costs (MC) are difficult to predict and measure.
c. Many benefits (MB) are subjective and difficult to measure.
C. 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.
1. Please review Part IV of 6) Government's Economic Functions for an analysis of government action
for an analysis of government action
to decrease externality costs and increase externality benefits
2. Coase's Theorem
a. 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.
b. He demonstrated that individual maximizing behavior would correct these problems.
c. The government should only be involved when the number of participants is so large as to make bargaining
d. 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.
Move to 3
3. Solving pollution
problem Orange Blossom Special: Externalities and Coase Theorem
A. The market solution
1. Applying 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 add additional spending.
2. The resulting acceptable pollution would be fixed and sold as "rights" to pollute.
3. Industrialization causes an increase in the demand to pollute and with a fixed
supply, the costs of rights to pollute would increase. 4. Those who want goods
that pollute would simply have to pay!
MCS is marginal cost to
society MGS is marginal gain
B. Other solutions
C. For more insight into tradable rights read Trading the Earth, the politics behind
tradeable pollution rights by Sharon Beder.
D. 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.
D. Externalities/transaction spillover are a cost or benefit that not transmitted through prices
A Government Intervention is used to to affect externalities
B. Externalities are the subject of chapter 31) The Economics of Government Subsidies.
E. Democracy and economic efficiency
1. Majority rule is often inefficient
a. A slight majority of people may vote less public spending in an area because theirbbperceived benefit is
slightly below the good's average cost they would pay as a taxpayer.
b. Voters for the activity (the minority) receive a benefit substantially greater than the average costs.
c. As a result society does not invest in something with a positive total return.
d. 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.
e. The public good is voted less money even though total benefit exceeds total cost.
2. Rent-seekers attempt to use public policy to get economic rent for themselves at
the expense of consumer surplus and in some cases, the public interest
3. Special interest groups are a few people with much
to gain from a political outcome.
a. Through political efforts they foster desired results at the expense of the many who
acquiesce because individually they have little to lose.
b. These groups often
form Political Action Committees (PACs) to lobby n their behalf.
4. 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.
Based Government Externality Intervention
E. Subsidizing agriculture markets (both buyers and producers)
2. Supply and Demand for agricultural products C3 Increased supply causes revenue to drop
III. Antitrust and
Other Government Regulation
5. A brief history of the merger movement
a. The late 19th century brought trusts (controlling corporations by controlling their boards of directors)
and the need for antitrust laws to regulate the many horizontal mergers of America's Gilded Age.
b. The 1920's brought vertical mergers as antitrust laws had made horizontal mergers difficult
c. The 1960's and early 1970's was the time of conglomerates, which combined unrelated businesses.
d. The 1980's brought corporate raiders who broke up conglomerates, many using junk (high risk)
bonds to finance leverage (high debt) buyouts.
e. The 1990's brought a return to mergers, many of them combining international companies.
6. Price fixing from Wikipedia
B. Antitrust laws
1. Sherman Antitrust Act of 1890 made monopolies and attempts to monopolize illegal.
Combinations, contracts, and conspiracies in restraint of trade were made illegal.
2. Clayton Act of 1914 prohibited tying contracts (tying the purchase of product A to
that of product B), price discrimination, and stock ownership of competitors which would
substantially lessen competition.
3. Federal Trade Commission Act of 1914 created the FTC to control deceptive business
4. Robinson-Patnan Act of 1936 made predatory pricing illegal
5. The Wheeler-Lea Act of 1938 amended the FTC Act to make unfair and deceptive
6. Celler-Kefauver Antimerger Act of 1950 made the purchase of assets of another company
illegal if the purchase would substantially lessen competition.
C. The changing role of government regulation
1. Before there was regulation there was ANDREW JACKSON who took on the eastern
bankers because he felt it had excessive power.
2. Important regulating agencies
a. Interstate Commerce Commission (ICC)-rails and trucking
b. Federal Aviation Administration (FAA)-air travel
c. Federal Communications Commission (FCC)-airways
d. Securities and Exchange Commission (SEC)-issuers of financial instruments such as
stocks and bonds
3. A move toward deregulation began by Margaret Thatcher in the 1970's spread to the
United States and Western Europe in the 1980's.
a. Many felt federal government regulation represents a costly and inefficient misallocation
of economic resources.
b. Railways, trucking, airlines, and financial institutions were deregulated in the late
1970's and 1980's.
1. Some deregulation activities were very costly (bank bailout of the late 1980's).
2. Overall, the jury is still out on the success of deregulation.
4. Regulators are
redirecting efforts away from maintaining competition toward social regulation.
a. Government regulation of industry has changed direction.
1. International competition requires companies work together to develop technology and share in its
2. Many feel government should foster cooperation among competitors with an industrial policy.
3. Others feel the market system should be left to direct resource (factor) allocation.
b. Regulation protecting individuals has become more prominent.
1. Environmental Protection Agency (EPA) protects individuals from pollution (air, water, noise).
2. Consumer Protection and Safety Commission (CPSC) protects consumers from unsafe products.
3. Food and Drug Administration (FDA) protects consumers from dangerous food, drugs, cosmetics, etc.
4. Federal Trade Commission (FTC) protects the consumer from unfair trade practices such as deceptive
5. Occupational Safety and Health Administration (OSHA) protects people while at work.
6. Equal Employment Opportunity Commission (EEOC) attempts to eliminate workplace prejudice.
7. National Labor Relations Board (NLRB) regulates activities between business and unions.
D. Antitrust prosecutions
1. Enforced by the antitrust division of the Justice Department
2. THEODORE ROOSEVELT took on the corporate monopoly Trusts
that control railroad rates and routes and thus destroyed small towns and farms.
3. Rule of Reason
a. Applied by the Supreme Court in a 1911 antitrust case against Standard Oil of New Jersey and the
American Tobacco Company
b. Court stated that behavior must be unreasonable in a competitive sense and anti-competitive effects
must be demonstrated.
c. Both companies were found guilty.
d. The Court ruled that bigness alone was not against the law in1921 when it ruled that U.S. Steel was
not a monopoly even though it controlled 50% of the market.
e. Bigness alone was prosecuted by the Supreme Court in 1945 as it broke up Alcoa because it
controlled 90% of the aluminum market.
4. Tight enforcement, which began in 1914, ended in the early 1980's.
A. Income statistics
|B. A Lorenz curve depicts
by plotting the percentage of income (Y)
received by different percentages of the
population. A 45-degree line represents
perfect equality as 10% of the population
receive10% of the income and 35% of the
population receive 35% of the income,
etc. Perfect inequality would be close to
the x-axis as 99% of the population
receive no income
|C. The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality. It has found application in the study of inequalities in disciplines as diverse as The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality. It has found application in the study of inequalities in disciplines as diverse as economics, health science, ecology, chemistry and engineering. from Gini coefficient of Wikipedia|
| D. Causes of income inequality
1. Personal endowments differ (mental, physical, and personal abilities)
2. Human capital investments differ (education and training)
3. Job characteristics cause people to accept differing amounts of
compensation (white vs. blue collar, job prestige, job risk)
4. Wealth generates income
5. Market power (unions, associations such as AMA, ABA, and AARP)
7. Willingness to assume risk
a. Recently, 2001-2202, (like 1991, and 1980) was not a great time
to be graduating from college and seeking a job.
b .The worst time was 1929 -1938. My dad graduated from Tufts
College in 1933. He got his first real job in 1937 and because of
WWII, he didn't get his first new car until 1947.
9. Power, CEOs have the power and no one can stop them.
Business Week, February 26, 2007 page 44
E. Understanding poverty
1. Poverty threshold (Chart) Originally set at three times a family's
minimum food requirement, it is now adjusted for inflation
2. The poverty rate is decreasing.
a. 32.0% of the population lived in poverty in 1950.
b. Just over 11% was the poverty rate through the early 1970's.
c. 15.2% of the population during 1981-82 recession which is the most recent
poverty rate peak.
d. 14.2% of the population (35.7 million people) in 1991 lived in poverty.
e. Between 1970 and 1990 the percentage of children living in poverty
increased from 14.9% to 19.9% with the corresponding increases for
white, black, and Hispanic children being 10.5% to 15.1%, 41.5% to
44.2%, and NA to 33.9% respectively.
3. Federal programs to help the poor
a. Payroll tax programs
1. Old Age, Survivors, and Disability Health Insurance (social security)
2. Medicare pays medical costs for social security recipients
3. Unemployment Compensation (paid by employers)
b. Programs financed from general revenues
1. Supplemental Security Income (elderly and disabled)
2. Aid to Families with Dependent Children (AFDC)
3. Food Stamps
4. Medicaid pays health care costs for the poor