POLSCI 331 Lecture Notes - Lecture 9: Pareto Efficiency, Avoidance Speech, Public Good
4 May 2018
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PHIL 9.29 Lecture Notes – Utilitarianism
Indication of social welfare – measure of the market (ish)
Asymmetric information failures
When does the market lead to social welfare improvements?
Market failure arguments doesn’t necessarily lead to the government improving the market
o Government improves market, in cases like pollution
Externality: consequence (cost or benefit) inflicted on someone else as a result of your actions
o Someone else = external to the transaction
o Intention is not very important
o You can be aware of a negative externality, but that doesn’t make the effect not an
externality
How does externalities impede efficiency?
o Pareto efficiency
▪ Externalities (negative) may cause someone worse off
▪ Positive externalities may lead to Pareto inefficiency
• Under-producing
▪ Public good – non-excludable positive externality – leads to fewer goods than there
would be in a private setting
▪ Sometimes not always worth internalizing externalities (never internalize all
externalities)
o Efficiency – all desires are satisfied
▪ Striving that matters, not the goal itself
Externalities indicate that you are at a socially inefficient state
o Doesn’t lead to necessary action
Ex: Bill Cosby
o Poisoning women and raping women
o The benefit to him may exceed the costs to the women because they didn’t know it
o Not efficient – relies on independent moral judgment
Public goods
o Non-rivalrous and non-excludable
o Doesn’t even have to be good for others
o Ex: fireworks
o Does it actually satisfy an existing desire? Is it worth producing?
▪ Purposeful public good?
• Does the cost exceed the benefit? (makes a value judgment)
▪ Some public goods are inefficient to produce
How do public goods impede efficiency?
o Under-produce relative to the efficient level
o A public good may be Kaldor-Hicks inefficient relative to the social optimum level
▪ You can’t charge customers for stuff – you typically cannot pay for much of it
▪ Free-rider problem
▪ Or assurance problem – you’re willing to pay for the public good, but you’re afraid
other people will be free-riders
Under-production and non-excludability
o Volunteering for the army
o My participation will increase the probability of victory by a tiny bit and everyone who
agrees with the war will benefit from this non-excludability
o Will realize that my participation will be neither necessary nor sufficient to produce the
desired result under-production
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Indication of social welfare measure of the market (ish) Externality: consequence (cost or benefit) inflicted on someone else as a result of your actions: government improves market, in cases like pollution. Is it worth producing: poisoning women and raping women, non-rivalrous and non-excludable. Public goods: purposeful public good, does the cost exceed the benefit? (makes a value judgment, some public goods are inefficient to produce. Profit-maximizing move = to put in sh. Each anonymously decides whether to invest sh, , , , , and . Upshot there are pareto and kaldor-hicks inefficient public goods. Experimentally show that the assurance problem and free-rider problem exists. Incentivizes insurance companies to provide good quality service because: delivers same product at a much lower cost. Should tax negative externalities rather than socially productive goods. Ex: scientific research: scientific information cannot be patented but application of some information can, universities write proposals to gain funding for research.
