Property Rights and Public Goods. Overview Externalities and Property Rights –Recycling Common...
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Transcript of Property Rights and Public Goods. Overview Externalities and Property Rights –Recycling Common...
Property Rights Property Rights and Public Goodsand Public GoodsProperty Rights Property Rights
and Public Goodsand Public Goods
Overview• Externalities and Property Rights
– Recycling
• Common Property Resources
• Public Goods & Private Preferences for Public Goods
• Benefit-cost Analysis
• Public Choice Process
The Efficient Amount of Recycling
Scrap
Cost
0 4 8 12
MCR
MSC
m*
With a refundable deposit,MC increases andMC = MSC = MCR.
MC + per unit refundMC
m1
Without market interventionthe level of scrap will be at m1
and m1 > m*.Households can dispose of glass and other garbage at very low cost. The low cost of disposal creates a divergence between the private and the social cost of disposal. S0, raising MC is a move in the right direction.
Extent of recycling
Refund is like a tax for non-compliance, but no tax if there is compliance
Refundable Deposits
Amount of Glass
$
D
Price falls to P’ and the amount of recycled glass increases to M*.
Sv
Sr
S
The supply of glass S is the horizontal sum of the
Supply of virgin glass (Sv)
and the supply of recycled
glass (Sr).
M1
P
Without refunds the price of glass is P and
Sr is M1.
S’r
S’
P’
M*
With refunds Sr increasesto S’r and S increases to S’.
Externalities and Property Rights
• Property Rights– Legal rules describing what people
or firms may do with their property– For example
• If residents downstream owned the river (clean water) they control upstream emissions.
• Bargaining and Economic Efficiency– Economic efficiency can be achieved
without government intervention when the externality affects relatively few parties and when property rights are well specified.
PRIVATE SOLUTION TO EXTERNALITIES
• Coase Thorem: Economic agents can arrive at an efficient solution (i.e., an optimum assignment of property rights)– irrespective of initial assignment of property
rights, – provided they can bargain free of cost (i.e., w/o
transaction costs), and – there is no wealth effect to thwart the
bargaining process.• Coase Theorem at Work: Negotiating an Efficient
Solution - 1987 --- New York garbage spill (200 tons) littered the New Jersey beaches– The potential cost of litigation resulted in a
solution that was mutually beneficial to both parties.
Coase Theorem
MC of pollution to MC of pollution to fisheriesfisheries
MC of pollution MC of pollution abatement by factoryabatement by factory
PollutionPollution Abatement Abatement
AA
CC
BB
EE O’O’OO FF
LL
XX
OE is optimal quantity of pollution and O’E is the corresponding optimal quantity of abatement
At E, the marginal costs of pollution and abatement are equal, and the sum of the total costs i.e. triangle OXO’ is the least
At A, MC of abatement exceeds MC of pollution, so it is cheaper to compensate the fishermen AB than to abate the pollution AC
Demand price for abatement falls short
Demand price forabatement now higher to facilitate pollution reduction
Common Property Resources
• Common Property Resource– Everyone has free access.– Likely to be over-utilized– Examples
• Air and water• Fish and animal populations• Minerals
• Solution– Private ownership
• Question– Wouldn’t private ownership be
impractical?
Common Property Resources
Fish per Month
Benefits,Costs($ per
fish)
Demand
However, private costsunderestimate true cost.
The efficient level of fish/month is F* where
MSC = MB (D)
Marginal Social Cost
F*
Private Cost
FC
Without control the numberof fish/month is FC where
PC = MB (marginal benefit).
Crawfish Fishing in Lousiana
• Finding the Efficient Crawfish Catch– F = crawfish catch in millions of pounds/yr– C = cost in dollars/pound
• Demand– C = 0.401 = 0.0064F
• MSC– C = -5.645 + 0.6509F
• PC– C = -0.357 + 0.0573F
• Efficient Catch– 9.2 million pounds– D = MSC
Crawfish Catch(millions of pounds)
CCost
(dollars/pound)
Demand
Marginal Social Cost
Private Cost
Crawfish as a CommonProperty Resource
11.9
2.10
9.2
0.325
Public Goods• Public Good Characteristics
– Non-rival• For any given level of production the
marginal cost of providing it to an additional consumer is zero.
– Non-exclusive• People cannot be excluded from
consuming the good.
• Not all government produced goods are public goods– Some are rival and non-exclusive (more
like a common property resource)
• Education
Typology of Goods
Characteris-tics
ExcludableNon-
excludable
Rival Private GoodCommon Property Resource
Non-rival Club Good Public Good
D1
D2
D
When a good is non-rival, the social marginalbenefit of consumption (D) , is determined by
vertically summing the individual demand curves for the good.
Efficient Public Good Provision
Output0
Benefits(dollars)
1 2 3 4 5 6 7 8 109
$4.00
$5.50
$7.00
Marginal Cost
$1.50
Efficient output occurswhere MC = MB at 2
units of output. MB is$1.50 + $4.00 or $5.50.
Horizontal sum of demand curves
What if this is the MC curve?
Problem with Public Goods
• Free Riders– There is no way to provide some goods
and services without benefiting everyone.– Households do not have the incentive to
pay what the item is worth to them.– Free riders understate the value of a good
or service so that they can enjoy its benefit without paying for it.
• Clean Air is a public good– Non-exclusive and non-rival
• What is the price of clean air?
How to know Private Preferences for Public
Goods?
• Government production of a public good is advantageous because the government can assess taxes or fees to pay for it.
• Determining how much of a public good to provide when free riders exist is however extremely difficult.
The Demand for Clean Air
Nitrogen Oxides (pphm)0
Dollars
1 2 3 4 5 6 7 8 109
2000
2500
3000
500
1500
1000
Low Income
Middle Income
High Income
Findings on Demand for Clean Air
– Amount people are willing to pay for clean air increases substantially as pollution increases.
– Higher income earners are willing to pay more (the gap between the demand curves widen)
– National Academy of Sciences found that a 10% reduction in auto emissions yielded a benefit of $2 billion---somewhat greater
than the cost.
Exercise 7, p.653: Willingness to pay for different quantities of the public
good
Time G-1 G-2 G-3 V.Sum
0 150 200 250 60050 100 100 200 400100 50 0 150 200150 0 0 100 100200 0 0 50 50250 0 0 0 0
Exercise 7, p.653: Willingness to demand the private good at different
prices
Price G-1 G-2 G-3 H.Sum
250 0 0 0 0200 0 0 50 50150 0 25 100 125100 50 50 150 25050 100 75 200 3750 150 100 250 500
Benefit-cost Analysis• Compares present value of benefits to present
value of costs of a government project, which is mostly in the nature of public goods
• Helps ranking projects in terms of benefit-cost ratio (must be >1) until available limited resources are exhausted
• Difficulties in BC ratio estimation:– Correctly estimating benefits & costs in the future,
especially their opportunity costs– Many benefits and costs - often in the nature of
intangibles - are not quantifiable– Choice of interest rate for discounting poses a very
serious problem & hence sensitivity analysis is performed to choose across different alternative rates
• Hence, BC analysis still a subjective art rather than an objective science
Public Choice ProcessBroad groups Major characteristics1. Voters Voting for policies favoring their interests
Generally less informed about political decisions than their market decisions – referred to as ‘rational ignorance’
- less need to gather information as elected leaders are empowered to take decisions on their behalf
- very expensive to gather information on public choice
- voters have less influence on and lesser affected by public choice as compared to market choice
2. Politicians As counterpart of firm entrepreneurs/managers, seek to maximize chance of re-election
Often responds to desires of small, well-organized, well-informed, well-funded, passionate & vocal interest groups at the cost of mostly silent and uninformed majority
Public Choice ProcessBroad groups Major characteristics3. Interest groups Organize lobbies and support
politicians willing to serve their interests, although laws & regulations are invariably rationalized in terms of national interest
4. Bureaucrats Often implements policies under monopoly conditions w/o caring for efficiency, unless there is pressure of competition to compete and coordinate
Often non-neutral and non-passive, actively trying to influence
policy & its implementation Hence as a special interest group
within government contributes to size & growth of the bureau
Some Institutional Changes Suggested to prevent ‘Government Failure’
• Informing, educating & organizing voters
• Contracting out government services not entirely public good in nature
• Encouraging inter-agency competition
• Referendum & thus frequently reverting to direct democracy
• Specify total amount of funds to be allocated across competing uses.