1. Non-Market Economics

2. Outside the Market
We have studied how consumers and firms behave in market situations: as buyers and sellers; as demanders and suppliers.
There is activity that occurs outside of market situations. Sometimes this activity is referred to as Market Failure

3. Market “Failures”
1. The Market might fail to provide certain desired goods and services
2. The Market might fail to reflect costs and benefits in the market price
3. Society might prefer a different result than the market determines

4. Public vs. Private Goods
A public good is a good that is available for everyone to consume, regardless of who pays and who doesn’t
A private good is consumed by a single person or household.

5. Definitions Public goods are:
1. “non-rival”: available to everyone to use
2. “non-exclusive”: can’t prevent “non-payers” from consuming
Private goods are;
1. “rival”: only one person can use the good
2. “exclusive”: non-payers can be kept from consuming the good

6. Public Goods and the Market
Private companies in Alexandria, VA put out fires only of homes of those who paid for protection. A plaque was displayed by those who had paid for the protection.

7. Public Goods
Public goods are seldom provided by the modern market, since the chance for earning a profit is greatly limited
Governments generally provide public goods

8. Examples of Public Goods
Public Schools
Public radio
Freeways – Interstate Highways
Free music concert
Internet
National Defense

9. Why provide public goods?
Why do we have public schools?
Because many groups benefit beyond the cost of providing public education:
Business prefers educated workers
Educated individuals earn higher incomes
Government collects more taxes from workers with higher incomes

10. Free-rider
A “free-rider” is a person who gets the benefits of a public good without paying for it.
Studies show that only 25% of public radio listeners actually contribute. How many of you listen to 89.7 the River? How many contributed to the fund raiser?

11. How to fund public goods?
Voluntary contributions would probably not pay for public goods like education and defense because of the free-rider problem:
1. Why pay when you can enjoy the public good for free?
2. Why pay for something you won’t use?

12. Taxes
Instead of voluntary contributions, we have given government the power to collect taxes to pay for public goods.
Oliver Wendell Holmes said, “Taxes are the price we pay for a civilized society.”

13. Public Choice Theories
Some feel that government is the best tool to intervene in the economy
Others oppose government intervention in the economy

14. Arguments in favor of Gov’t
Politicians must avoid extreme positions to appeal to the “median voter”
Voters can “vote with their feet” and move to communities that reflect their preferences on spending and taxes

15. Arguments against Gov’t
Self Interest:
1. Voters – are ill-informed. Being an informed voter takes time, effort and money.
2. Politicians – Don’t keep promises, are only concerned with getting reelected
3. Bureaucrats – are only interested in keeping their jobs.

16. Arguments against Gov’t
Small special interest groups can manipulate government to their benefit
When benefits are concentrated for only a few there is an incentive to spread the costs among many.
To achieve this end, special interests use lobbyists to express views

17. Spillover or Externalities
The costs or benefits of some goods are not limited to just the producers and consumers involved in the market for these goods, they “spillover” to others.
Since the costs or benefits aren’t included in the market price, they are referred to as external costs or benefits

18. External benefits
Flowers and flowering trees, that the middle school librarian enjoys as she drives past my house.
Outside of the price determined by supply and demand

19. External Costs
Costs that are outside of the price determined by supply and demand.
Examples might include pollution, noise pollution.

20. Correct for Market failures
Government could intervene.
Establish fines for pollution
Tax polluters
Legal Action to sue polluters for damages
Set up regulations
Create pollution permits
These steps INTERNALIZE the external costs, making them show up in the supply and demand graph.

21. Complete Concrete in Elkhorn
An example of government intervention

22. External benefits Pass a law, and make violators pay a fine.
Or we could subsidize, help pay for the desired product.

23. Without Government Action
Coase theorem
In cases of clear property ownership, a few individuals might be able to “internalize external costs”
The weedy lawn
The cows and wheat.

24. Income Distribution
In our market society, income is not distributed equally among households.
Is this inequality acceptable? What if anything should we do about it?

25. Quartile Income Distribution%
‘79
‘81
‘83
‘85
‘87
‘89
‘91
‘93
‘97
2004 20
4.2
4.1
4.0
3.9
3.8
3.5
3.6
3.4
10.2
10.3
10.0
9.9
9.8
9.4
9.5
9.1
8.9
8.7
17.2
16.5
16.6
16.1
15.7
16.0
15.1
14.8
24.3
24.9
24.4
24.5
24.6
23.7
24.2
23.0
44.1
44.3
45.1
45.6
46.1
46.8
46.5
48.6
49.3
50.0

26. Lorenz Curve
The Lorenz Curve illustrates the inequitable distribution of income
See the graph on the board

27. Poverty
This unequal distribution leaves a portion of the population in poverty
Poverty for a household is defined by an income below a “poverty budget”
A poverty budget is based on a minimum food budget X 3.
In 1999 an income below $17,029 for a family of four was considered poor

28. 2006 HHS Poverty Guidelines
Persons in Family
1 $ 9,800
2 $ 13,200
3 $ 16,600
4 $ 20,000
5 $ 23,400
6 $ 26,800
7 $ 30,200
8 $ 33,600
For each additional person, add $3,400  

29. Inadequate Education
Percentage of households with college degrees in poverty:
2.4%
Percentage of households without a high school diploma in poverty:
24.1%

30. Education and Income

31. Gender Discrimination

32. Racial Discrimination

33. Single parent Two parent families in poverty: 4.8%
Single parent families in poverty: 27.8%

34. Solutions Welfare Reform? Income Redistribution Education
Affirmative Action vs. “Legacies”

35. Zero Sum Society
In any policy decision there are winners and losers, just like a poker game
It is important to ask “Who are the winners and who are the losers?”

36. Cost Benefit Analysis Costs < Benefits Costs > Benefits
Make the choice
Costs > Benefits
Don’t make the choice
Basketball officials
Vacation Speeding