public goods and public choice
DESCRIPTION
Public Goods and Public Choice. Public Goods. Private goods Rival in consumption Exclusive Provided by private sector Public goods Nonrival in consumption Nonexclusive Provided by government. Public Goods. Natural monopoly Nonrival but exclusive With congestion: private goods - PowerPoint PPT PresentationTRANSCRIPT
PowerPoint Slides prepared by: Andreea CHIRITESCU
Eastern Illinois University
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Public Goods and Public Choice
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Public Goods1. Private goods
– Rival in consumption– Exclusive– Provided by private sector
2. Public goods– Nonrival in consumption– Nonexclusive– Provided by government
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Public Goods3. Natural monopoly
– Nonrival but exclusive– With congestion: private goods– Provided by private sector or government
4. Open-access good– Rival but nonexclusive– Regulated by government
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Exhibit 1
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Categories of Goods
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Optimal Provision of Public Goods• Nonrival in consumption
– Once produced: available to all consumers
• Market demand curve– Vertical sum of individual demand curves– Marginal benefit
• Efficient level of public good– Market demand curve intersects marginal
cost curve5
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Exhibit 2
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Market for Public Goods
10
5
$15
Dol
lars
pe
r hou
r
20 Hours of mosquito spraying per week
Dm
Da
Marginal cost
D
D
e
Because public goods, once produced, are available to all in identical amounts, the demand for a public good is the vertical sum of each individual’s demand. Thus, the market demand for mosquito spraying is the vertical sum of Maria’s demand, Dm, and Alan’s demand, Da. The efficient level of provision is found where the marginal cost of mosquito spraying equals its marginal benefit. This occurs at point e, where the marginal cost curve intersects the market demand curve, D.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Paying for Public Goods• Public goods are paid for through
taxation.• Some households have greater ability to
pay taxes than others – Efficient, but not fair
• Free-rider problem– People try to benefit from the public
goods without paying for them
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Rent Seeking• Rent seeking
– Activity special-interest groups undertake – To secure special favors from
government– No incentive for economic efficiency
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Campaign finance reform
• Special-interest money– Donated by special-interest groups
• Soft money – Allows political parties to raise unlimited
amounts from individuals, corporations, and labor unions
– To spend it freely on party building activities
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The Underground Economy• The underground economy
– Unreported market activity• To avoid taxes• Illegal
• Tax avoidance– Legal - Pay least possible tax
• Tax evasion – Illegal - No or fraudulent tax return
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The Underground Economy• Underground economy grows more
when: – Government regulation increase– Tax rates increase– Government corruption is more
widespread• Estimated: $1.5 trillion in 2010
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Bureaucracy• Bureaus
– Government agencies• Charged with implementing legislation• Financed by appropriations from legislative
bodies– Receive less consumer feedback– Less incentive to act on any feedback – Less incentive to eliminate waste and
inefficiency
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Bureaucracy in Repr. Democracy• Bureaucratic objectives
– Serve the public– Maximize budget
• Larger budget than desired by median voter
• Private vs. public production– Private production – may be more
efficient– Public production – preferred by public
officials13