POLSCI 331 Lecture Notes - Lecture 8: Pareto Efficiency, Assurance Contract, Private Good
4 May 2018
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PHIL 9.24 Lecture Notes
Market – arena for exchange
Market failure – when a market fails to achieve efficiency
o Pareto efficiency: when all Pareto improvements have been exhausted
▪ Not realistic, just a goal
o Kaldor-Hicks efficiency: when the net benefit is positive
▪ Ex: torturing one person to save a thousand lives
▪ Looser version of the Pareto efficiency
▪ Much more subjective?
• Subjective comparisons of utility among people
▪ Ex: one guy who has enlarged pleasure senses
• Give him everything and that will be the most efficient solution
Causes for market inefficiency:
o Externalities: something that is not taken into account when you take an action that fulfills
your self-interest
▪ Net cost or benefit that results from something
o Public goods
▪ Non-excludable – anyone can use the public good
▪ Non-rivalry – someone else’s consumption does not affect the good
• Depends more on the nature of the good
▪ Producer cannot control who gets the public good
▪ Free, universal health care?
• But it’s excludable since someone taking up a hospital bed would someone
else from using that bed
• Changing the circumstances would make it not a public good
Private production of public goods tends to lead to underproduction
o Problem of free-riding
o No incentive to produce enough for everyone
▪ Ex: lobbying for Congress – if one big corporation lobbies and succeeds, other
corporations wouldn’t pitch in the fees
o Ex: building roads
o Ex: Kickstarter – no one will get charged until the end result is reached
▪ Production of a good that is a public good but not everyone wants to use it
▪ Conditionally binding assurance contract
▪ Assurance is among the people donating the money
o Ex: voting
▪ MB < MC - The cost of becoming informed of politics outweighs the benefit of voting
(since your vote means so little)
▪ Why is this a problem for the public production of public goods?
• Legislation/politicians will not be good decisions that represent public
interest
o Genome project – why is it a public good?
▪ Mapping human genome
▪ Information is public
▪ What about information about a new deadly form of smallpox?
• Does the publishing of the paper count as a public good?
• YES! A public good doesn’t actually be good. The opposite of a public good is
a private good.
Public production of private goods tends to lead to overproduction
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