Post-Lecture #9

Building infrastructure is left to the government because

The cost of such projects would not be economical for any individual firm.

What government policies can be used to promote productivity growth?

Government can promote productivity growth by designing policies that lead to more spending on infrastructure, human capital, and research and development. These policies might take the form of increased government spending in these areas or instead provide greater incentives for private individuals and investors to undertake the increased expenditures.

How might the effects of government spending on proper sewage infrastructure, which results in improved sanitation for crowded cities in poor countries, promote economic growth?

Government spending in infrastructure can increase productivity in many ways. Government spending in education and health usually has high returns. Improving health conditions in poor countries' crowded cities usually decreases the prevalence of transmissible diseases like cholera. This reduces the costs associated with treating patients at the same time it increases returns to education (e.g., children do not miss as many school days as before). This results in a healthier and therefore more productive labor force, increasing the balanced growth part of output per capita.

Do you think corruption affects the enforcement of property rights or is it that badly designed institutions create opportunities for corruption? In other words, does corruption determine the enforcement and design of property rights or is it the other way around, with causality running from the design of property rights to corruption. Explain your arguments.

Unfortunately there is no clear answer for this question. There are valid arguments for both positions. The prevalence of corruption in a society makes the enforcement of property rights very difficult, as government officials are often bribed in exchange for preferential treatments or concessions. Also, in a society in which most people are corrupt it often pays off to behave as a corrupt individual, making this problem even worse. It is also true, however, that badly designed institutions can promote corruption. This is the case when bureaucracies create positions (usually government officials) that create the opportunity for individuals to exert some power. If you have to pay many license fees to obtain a permit to conduct your businesses, it is probable that the higher the number of licenses you have to obtain at different government offices, the more bribes you will be asked to pay. This is an example of a vicious circle from which it is very difficult to escape. Poor countries often exhibit a combination of poorly designed and enforced property rights and corruption.

The International Property Rights Index (IPRI) ranks countries according to the significance and protection of both intellectual and physical property rights. What correlation between income-per-capita growth and the IPRI ranking might you expect? Why?

We should expect that countries that have better designed and enforced property rights are the ones with better standards of living. Properly enforcing property rights increases individuals' and firms' ability to recover their investment needed to advance technology. After the period from which the innovation is made excludable by patents laws (or the enforcement of some other property right), technology spills over and benefits the whole society, even the world. Countries in which individuals and firms have the incentives to engage in R&D will benefit the most from this innovation process. As predicted, the IPRI ranking and per capita income growth are strongly correlated.

As an input to production, how does technology differ from labor and capital inputs?

As physical objects, labor and capital inputs are rival and excludable: They can only be used in one productive activity at a time, so that using them to produce one thing precludes their use to produce something else, and they cannot be used by producers who have not obtained permission to do so. Technology (ideas) differs completely in these important characteristics. Ideas can be used in more than one productive activity at the same time, and are more likely to be nonexcludable, so that other people can use them without permission or payment for their use. In these respects, technology has the characteristics of public goods.

Why may private R & D expenditures be too low?

Because of the non-excludable nature of technology, many of the benefits of new technology will be external. This means that private businesses who invest in R&D will not get the full benefits of the new technology they create and therefore may not expect to earn enough profits to justify the R&D investment necessary to develop the new technology.

A key difference between human capital and technology is that:

Human capital is excludable.

The non-rivalrous character of technological ideas suggests that:

Ideas can be used over and over again.

Government spending on public health promotes economic productivity by:

Increasing human capital.

Investments in public infrastructure:

May boost productivity and income.

What role does the legal system play in promoting property rights?

Property rights are no better than the legal system that defines, interprets, and enforces them. To promote strong property rights a society needs an effective legal system that enforces contracts, has adequate resources (courts and judges) to hear and decide cases within a reasonable time, and provides access to lawyers so aggrieved parties can have their day in court.

What are property rights and how do they influence economic growth?

Property rights protect property owners from government and others that might want to extort their wealth. They promote economic growth by providing incentives to save and invest and allocate capital to its most productive uses.

Private businesses tend to spend too little on research and development, because:

Technology is often nonexcludable.

Because original ideas are likely to become known and used by others without the inventor's knowledge or consent:

Technology is the key driver of economic growth.

.The U.S. government has provided billions of dollars for broadband Internet access nationwide, including grants for rural broadband access, expansion of computer center capacity, and sustainable broadband adoption initiatives. Is there a good rationale for such a policy? Discuss.

This is the U.S. government's effort to support and expand broadband internet access across the United States. The idea is to increase technology and to make each U.S. worker more productive. Easier and faster internet access can reduce businesses' costs, for example by allowing faster inventory updates. It can also create opportunities for new businesses as the internet has already done for many entrepreneurs.

Physical objects are rival in the sense that:

When they are used in one activity, they cannot be used in another.