Chapter 16 Public Goods and Public Choice © 2009 South-Western/ Cengage Learning.
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Transcript of Chapter 16 Public Goods and Public Choice © 2009 South-Western/ Cengage Learning.
![Page 1: Chapter 16 Public Goods and Public Choice © 2009 South-Western/ Cengage Learning.](https://reader035.fdocuments.us/reader035/viewer/2022062620/551a3b2955034619378b5ca1/html5/thumbnails/1.jpg)
Chapter 16
Public Goods
and Public Choice
© 2009 South-Western/ Cengage Learning
![Page 2: Chapter 16 Public Goods and Public Choice © 2009 South-Western/ Cengage Learning.](https://reader035.fdocuments.us/reader035/viewer/2022062620/551a3b2955034619378b5ca1/html5/thumbnails/2.jpg)
Private, Public Goods, and in Between
1. Private goods– Rival in consumption– Exclusive– Provided by private sector
2. Public goods– Nonrival in consumption– Nonexclusive– Provided by government
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Private, Public Goods, and in Between
3. 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 1Categories 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 D curve intersects MC curve
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Exhibit 2Market for public goods
6
10
5
$15
Dol
lars
per
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.
The efficient level :MC of mosquito spraying equals its marginal benefit; at point e, where the marginal cost curve intersects the market demand curve .
The market demand for mosquito spraying (D) is the vertical sum of Maria’s demand, Dm, and Alan’s demand, Da.
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Paying for Public Goods• Tax = marginal valuation
– Free-rider problem• People try to benefit from the public goods
without paying for them
– Ability to pay
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Public Choice in Representative Democracy
• Public choices– Government decisions
• Public goods• Taxes
• Median-voter model– The preference of the median voter will
dominate other choices
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Special Interest and Rational Ignorance
• Elected officials: Maximize political support– Special interest rather than – Public interest
• Asymmetry • Voters ‘rational ignorance’
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Distribution of Benefits and Costs
1. Widespread benefits; widespread costs– Traditional public-goods legislation– Positive impact on economy
• Total benefits > total costs
2. Concentrated benefits; widespread costs– Special-interest legislation– Harms the economy
• Total costs > total benefits
– Pork-barrel spending10
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Distribution of Benefits and Costs
3. Widespread benefits; concentrated costs– Populist legislation– Beneficiaries: rationally ignorant
4. Concentrated benefits; concentrated costs
– Competing-interest legislation– Fierce political battles
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Exhibit 3Categories of legislation based on the distribution of
costs and benefits
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Farm subsidies
• The Agricultural marketing agreement act, 1937–Prevent ‘ruinous competition’–One in four Americans: farm–Floor prices
• 2007–One in fifty Americans: farm
• $18 billions a year
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Farm subsidies
• To subsidize farmers, consumers pay–Higher product price–For the surplus (taxpayers)–For storage (the government buys the
surplus)–E.g. milk
• Free market p=$1.50• Subsidized p=$2.50+$2.50+$0.50
• Farmers: normal profit14
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Exhibit 4Effect of milk price supports
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0 75 100 150Millions of gallons
per month
$2.50
1.50
Dol
lars
per
gal
lon
S
D
Excess quantity supplied
No government intervention: market price = $1.50 per gallon, and 100 million gallons are sold per month.
Government: floor price = $2.50 per gallon, quantity supplied increases and the quantity demanded decreases.
To maintain the higher price, the government must buy the excess quantity at $2.50 per gallon.
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Rent Seeking• Activity interest groups undertake
– Secure special favors from government• Political action committees• Shift resources from production• No incentive for economic efficiency
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Campaign finance reform
• Special-interest money• Soft money• Hard money• Money matters more to challengers • Efforts to limit campaign spending
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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
– Government regulation increase– Tax rates increase– Government corruption widespread
• Estimated: $1.4 trillion in 2007
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Bureaucracy in Representative Democracy
• Bureaus– Government departments, agencies
• Ownership– Taxpayers
• Funding– Government appropriation
• Less incentive to eliminate waste and inefficiency
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• Bureaucratic objectives– Serve the public– Maximize budget
• Larger budget than desired by median voter
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Bureaucracy in Representative Democracy
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• Private vs. public production– Private production – may be more
efficient– Public production – preferred by public
officials
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Bureaucracy in Representative Democracy