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Chapter 17

Chapter 17- Public Goods and Common Resources

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Economics 1021A/B
Michael Parkin

Chapter 17- Classifying Goods and Resources Excludable a good is excludable if it is possible to prevent someone from enjoying its benefits • • a good is nonexcludable if it is impossible or extremely costly to prevent anyone from benefitting from it Rival • a good is rival if one person’s use of it decreases the quantity available for someone else • a good is nonrival if one person’s use of it does not decrease the quantity available for someone else A Fourfold Classification PRIVATE GOODS • rival and excludable i.e. can of coke PUBLIC GOODS • nonrival and nonexcludable, can be consumed simultaneously by everyone and no one can be excluded from enjoying its benefits i.e. national defense COMMON RESOURCES • rival and nonexcludable • unit of common resource can be used only once, but no one can be prevented from using it i.e. ocean fish NATURAL MONOPOLIES • economies of scale exist over the entire range of output for which there is a demand • special case arises when the good or service can be produced at zero marginal cost • such a good is nonrival • if it is also excludable, it is produced by a natural monopoly i.e. internet Public Goods The Free-Rider Problem • a free rider enjoys the benefits of a good or service without paying for it • a public good is provided for everyone to use and no one can be excluded from its benefits, no one has an incentive to pay his or her share of the cost • free-rider problem is that the market would provide an inefficiently small quantity of a public good • marginal social benefit from the public good would exceed its marginal social cost, deadweight loss would occur Marginal Social Benefit of a Public Good • a person’s marginal benefit from a public good diminishes as the quantity of the good increases, marginal benefit curve slopes downward • because everyone gets the same quantity of a public good, its marginal social benefit curve is the sum of the marginal benefits of all individuals at each quantity- it is the vertical sum of the individual marginal benefit curve contrast the marginal social benefit curve for a public good with that of a private good • • to obtain marginal social benefit curve for a private good, sum the quantities demanded by all individuals at each price, we sum the individual marginal benefit curve horizontally Marginal Social Cost of a Public Good marginal social cost of a public good is determined in exactly the same way as that of a private • good • principle of increasing marginal cost applies Efficient Quantity of a Public Good • to determine the efficient quantity of a public good, find the quantity at which marginal social benefit equals marginal social costs • if marginal social benefit exceeds marginal social cost, resources can be used more efficiently by increasing the quantity • extra benefit exceeds the extra cost • if marginal social benefit equals marginal social cost, resources cannot be used more efficiently • to provide more it would cost more than the additional coverage is worth and to provide fewer lowers the benefit by more than its cost saving Inefficient Private Provision could a private firm deliver the efficient quantity of satellites? • • it couldn’t because no one would have an incentive to buy his or her share of the satellite system • private provision is inefficient Efficient Public Provision • competition in the political marketplace results in the efficient provision of a public good THE PRINCIPLE OF MINIMUM DIFFERENTIATION • tendency for competitors to make themselves similar to appeal to the maximum number of clients or voters is called the principle of minimum differentiation • describes the behaviour of political parties • for the political process to deliver the efficient outcome that you’ve just seen, voters must be well informed, evaluate the alternatives and vote in the election • political parties must be well informed about voter preferences Inefficient Public Overprovision • if competition between two political parties is to deliver the efficient quantity of a public good, bureaucrats must cooperate and help to achieve this outcome • in the case of satellites, bureaucrats in the Department of National Defense (DND) must cooperate OBJECTIVE OF BUREAUCRATS • bureaucrats want to maximize their department’s budget because a bigger budget brings greater status and more power • DND’s objective is to maximize defense budget • won’t overproducing satellites cost future votes? it will if voters are well informed and know what is best for them • but voters might not be well informed and well-informed interest groups might enable the DND RATIONAL IGNORANCE • it is rational for a voter to be ignorant about an issue unless that issue has a perceptible effect on the voter’s economic welfare • rational ignorance is the decision not to acquire information because the cost of doing so exceeds the expected benefit • voters remain relatively uninformed about the technicalities of defense issues • voters who own for work for firms that produce satellites have a direct personal interest in defense because it affects their incomes and careers • these voters have an incentive to become well informed about defense issues and to operate a political lobby aimed at furthering their own self-interests • informed voters who produce that public good exert a larger influence than do the relatively uninformed voters who only use the public good • when the rationality of the uninformed voter and special interest groups are taken into account, the political equilibrium provides public goods in excess of the efficient quantity Two Types of Political Equilibrium SOCIAL INTEREST THEORY • predicts that governments make choices that achieve an efficient provision of public goods • this outcome occurs in a perfect political system in which voters are fully informed about the effects of policies PUBLIC CHOICE THEORY • predicts that governments make choices that result in inefficient overprovision of public goods • this outcome occurs in political markets in which voters are rationally ignorant and base their votes only on issues that they know affect their own net benefit • voters pay more attention to their self-interests • public officials also act in their own self-interest • result is government failure Why Government is Large and Growing • government grows in part because the demand for some public goods increases at a faster rate than the demand for private goods • two possible reasons VOTER PREFERENCES • as voters’incomes increase, the demand for many public goods increases more quickly than income • income elasticity of demand for many public goods is greater than one • these goods include public health, education, national defense • if politicians did not support increases in expenditures on these items, they would not get elected INEFFICIENT OVERPROVISION • inefficient overprovision might explain the size of government but not its growth rate • it possibly explains why government is larger than its efficient scale Voters Strike Back • if government grows too large relative to the value that voters place on public goods, there might be a voter backlash against government programs and a large bureaucracy • another way in which voters can try to counter the tendency of bureaucrats to expand their budgets is to privatize the production of public goods • government provision of a public good does not automatically imply that a government- operated bureau must produce the good i.e. garbage collection Common Resources The Tragedy of the Commons • tragedy of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource • if no one owns a resources, no one considers the effects of her or his use of the resource on others THE O
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