Chapter 16: Public Choices, Public Goods, and Healthcare

How we get societal equilibrium:

1. Public Provision 2. Subsidy 3. Voucher

4 groups of decision makers:

1. Voters 2. Firms 3. Politicians- we elect to carry out our bidding 4. Bureaucrats- works in office but wasn't elected

4 advantages to vouchers:

1. can be used for public or private provision; creates competition 2. Governments set the value and total size of voucher programs which can avoid bureaucratic padding and over provision 3. The public contribution is spread thinly across many participants; little inventive for participants to engage in rent seeking 4. Final consumer has buyer power; forcing firms to compete by offering better service

External benefit

a benefit that someone other than the consumer receives

Private benefit

a benefit that the consumer of a good or service receive

Public choices

a decision that has consequences for many people and perhaps the entire society

Private choices

a decision that has consequences only for the person making it

Pure Public Good

a good that is a non-rival and non-excludable in consumption, which is a good that enters into each agents utility function in the same quantity; do NOT need to be valued equally

Subsidy

a payment that the government makes to private producers (Reverse Tax) -pushes supply curve right so that we now have the equilibrium at the desired quantity

Voucher

a token that the government provides to households which they can use to buy specified goods or services

Marginal Private Benefit

benefit from an additional unit of a good or service that the consumer of the good or service receives Ex: flu shot benefits you

Underproduction

can result if bureaucrats pad their budgets and have wasteful spending- shortage

Overproduction

can result if bureaucrats seek to maximize their budget and programs- surplus

Government intervention leads to...

deadweight loss

Non-excludable good or service

if everyone benefits from it regardless of whether or not they pay for it

Rival good, service, or resource

if its use by one person decreases the quantity available for someone else

Non-rival good, service, or resource

if its use by one person does not decrease the quantity available for someone else

Excludable good or service

if only the people who pay for it are able to enjoy its benefits

Common Resource

is rival and non-excludable Ex: fish in the ocean- anyone can fish, more fish caught less quantity available

Private Subsidies

might overcome some of the problems associated with bureaucracies, but the subsidy budget ultimately depends on bureaucracies

Government failure

occurs when government action leads to inefficiency, which could be under-provision or over-provision of resources to a given activity

Free Rider

problem is the absence of an incentive for people to pay for what they consumer

Principle of Minimum Differentiation

tendency for competitors to make themselves similar in order to appeal to the maximum number of customers or voters

Tragedy of the commons

the absence of incentives to prevent the overuse and depletion of a resource

Marginal External Benefit

the benefit from consuming one more unit of a good or service that people other than the consumer enjoy Ex: flu shot benefits others by you not sharing sickness

Political Equilibrium

the choices of all four groups are compatible and no group can see a way of improving its position by making a different choice; efficiency in the use of resources is possible but not guaranteed

Rational Ignorance

the decision not to acquire information because of the cost of doing so exceeds the expected benefit

Marginal Social Benefit

the marginal benefit enjoyed by the entire society MSB= Marginal Private Benefit + Marginal External Benefit

Public Provision

when a public authority receives payment from the government to produce a good/service Ex: public universities