CH.5 PUBLIC GOODS, CHOICE, AND GOV. FAILURE

CHARACTERISTICS of public goods

•Nonrivalry •Nonexcludability •Free-rider problem

COST

•Resources diverted from private good production. •Private goods that will not be produced.

BENEFIT

•The extra satisfaction from the output of more public goods.

GOVERNMENT FAILURE CHARACTERISTICS

- Bundled and limited choices - Principal-agent problem - Earmarks - Rent seeking behavior

IMPERFECT INSTITUTIONS

- Criticisms of public sector inefficiency. - Markets and government are both imperfect. - Difficult to assign a good or service to either the public sector or the private sector.

LIMITED AND BUNDLED CHOICE

- Only two or three choices for candidates for election. - Bureaucracy and inefficiency. - Public agencies less efficient than private businesses. - No test of profit and loss. - Government employees often gain political clout and bureaucrats justify their continued employment.

CHARACTERISTICS of private goods

- Rivalry - Excludability

EXAMPLE of public goods

- The demand curve of public goods may underreport how much consumers are willing and able to pay. - Public or social goods would not be produced through the market because they possess the characteristics of nonrivalry and nonexcludability. - Nonrivalry means that when one consumes the good this does not preclude another from consuming the good. - Nonexcludability means that no one can be prevented from enjoying the benefits of a public good. With nonrivalry and nonexcludability, public goods suffer from the free-rider problem. - The free-rider problem means that many people can benefit from the goods without paying, making it unprofitable for firms to produce these goods since they have no way to ensure that only paying consumers will enjoy the good. - As a result, government often provides these goods. Examples of public goods include national defense, public music concerts, and outdoor fireworks displays.

MEDIAN VOTER MODEL

- The median-voter model suggests the median voter is likely to determine the outcome of the election. - The median voter is the voter holding the middle position on an issue. •At any point, people may be dissatisfied with the median preference. •People may "vote with their feet." •Median preferences can change over time. - There is a tendency for public choices and election outcomes to match most closely with the median view. - Since information about the median position is imperfect and can change over time, there is much room for politicians to misjudge the true median position.

WHEN do demand-side market failures occur?

- When it is not possible to charge consumers for the product. - Some can enjoy benefits without paying. - Firms not willing to produce since they cannot cover the costs.

PUBLIC CHOICE THEORY

- is the economic analysis of government decision making, politics, and elections. - Market failure. - Government failure.

Private goods are produced through the market because they have...

- rivalry (one's use of a good makes it unavailable for others) and, - come in units small enough to be afforded by individual buyers. - Private goods are subject to excludability, the idea that those unable and unwilling to pay do not have access to the benefits of the product. - Since the goods have rivalry and excludability, private firms can produce and sell the goods for a profit.

Demand-side market failures occur because....

- there are situations when it is impossible to charge all consumers, or any consumers, the price that they are willing to pay. - A public fireworks display is an example where people don't have to pay to enjoy the display. - Private firms would be unwilling to produce outdoor displays as it would be impossible to raise enough revenue to cover production costs. - Firm can't prevent people from watching the fireworks if they didn't pay.

QUASI-PUBLIC GOODS

A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.

Government can use a ____________-_________________ _________________________, which is a practical way to decide whether to produce a good and how much to produce. Government might use this method in determining whether or not to build a new highway.

COST-BENEFIT ANALYSIS

THE REALLOCATION PROCESS

Government levies taxes on households to decrease the private demand.This frees resources from production of private goods and makes them available for production of public and quasi-public goods. Taxes remove resources from private use.

_________________________ ___________________ are produced in the market by firms. Offered for sale.

PRIVATE GOODS

_____________________ _____________________ are goods provided by government. Offered for free.

PUBLIC GOODS

__________________-____________________ _____________________ are those that have large positive externalities or spillover benefits where benefits accrue to some third party external to the market transaction, so government will sponsor their provision. Otherwise, if they were produced in the private market they would be underproduced.

QUASI-PUBLIC GOODS

could be provided through the market system. Because of positive externalities the government provides them. Examples are education, streets, museums.

QUASI-PUBLIC GOODS

Government: •Taxes individuals and businesses •Takes the money and spends on production of public goods

REALLOCATION PROCESS - The government taxes individuals and businesses, which reduces their incomes and reduces demand for private goods, but increases the production of public goods when government spends that tax revenue.

EARMARKS

Special spending projects that are set aside on behalf of individual members of Congress for their constituents.

RENT SEEKING BEHAVIOR

The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.

PRINCIPAL-AGENT PROBLEM

a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him

MARKET FAILURE

a situation in which the market does not distribute (allocate) resources efficiently - Studying market failure helps us understand how regulating markets may help improve the allocation of resources.

COST-BENEFIT ANALYSIS

a study that compares the costs and benefits to society of providing a public good

GOVERNMENT FAILURE

an inefficient allocation of resources caused by government intervention in the economy - studying government failure can help us understand how changes in the way government functions might help it to operate more efficiently. - Incentives may lead political representatives to pursue policies that go against the preferences of the people, and the majority voting system we use can make it difficult to know voter preferences.

RIVALRY

competition for the same objective or for superiority in the same field.

PRIVATE GOODS

goods that are both excludable and rival in consumption

DEMAND-SIDE MARKET FAILURES

happen when demand curves do not reflect consumers' full willingness to pay for a good or service

FREE-RIDER PROBLEM

the problem faced by interest groups when citizens can reap the benefits of interest group action without actually joining, participating in, or contributing money to such groups. - bigger the group, bigger the problem

EXCLUDABILITY

the situation in which anyone who does not pay for a good cannot consume it

NONRIVALRY

the situation in which increased consumption of a good by one person does not decrease the amount available for consumption by others

NONEXCLUDABILITY

the situation in which no one can be excluded from consuming the good