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Economics in One Lesson Interventions Lesson 21: Government and Public Goods.

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Presentation on theme: "Economics in One Lesson Interventions Lesson 21: Government and Public Goods."— Presentation transcript:

1 Economics in One Lesson Interventions Lesson 21: Government and Public Goods

2 Economics in One Lesson The Rules of the Game Rule of Law exists when rules that govern behavior and interactions among individuals and groups of individuals apply to both the governed and the governing. Rule of Man exists when laws are applied at the discretion of the governing. Under the Rule of Force, people own what they can defend.

3 Economics in One Lesson What Should Government Do? Limited power of central government Life, liberty, pursuit of happiness (self interest, profit) Establish and enforce protection of property rights Government should do what citizens cannot do!

4 Economics in One Lesson Private vs. Public Sectors The private sector is made up of households, businesses, and the international sector. Producers and Consumers The public sector refers to activity by the various levels of government. Consumers and Thieves

5 Economics in One Lesson Optimal Provision of Public Goods With private goods, consumers decide what quantity to buy; market demand is the sum of those quantities at each price.

6 Economics in One Lesson Optimal Provision of Public Goods With public goods, there is only one level of output, and consumers are willing to pay different amounts for each level. The market demand for a public good is the vertical sum of the amounts that individual households are willing to pay for each potential level of output.

7 Economics in One Lesson Optimal Production of a Public Good The optimal level of provision for public goods means producing as long as societys total willingness to pay per unit D (A+B) is greater than the marginal cost of producing the good.

8 Economics in One Lesson The Economic Functions of Government Enforce Laws and Contracts Protect Private Property

9 Economics in One Lesson The Economic non-Functions of Government Maintain Competition Redistribute Income Provide an Economic Safety Net Provide Public Goods Nonexclusion Shared consumption Correct Market Failures Provide market information Correct negative externalities Subsidize goods with positive externalities Stabilize the Economy Fight unemployment Encourage price stability Promote economic growth None of these are the functions of true government

10 Economics in One Lesson Market Failures? Public Goods and Bads (Externalities) Asymmetrical Information Moral Hazard Rule Violations Monopolies Business Cycles All caused by Government

11 Economics in One Lesson How do we evaluate governments role in the economy? Government should do those things people cannot do for themselves. Abraham Lincoln

12 Economics in One Lesson At the margin, the opportunity cost of public spending is private spending. The opportunity cost of government spending on a particular program is the foregone benefit of the other program where the money would have been spent. Government spending is paid for by taxation, which is involuntary. Therefore, (some) citizens undertake actions to minimize their tax burden – using more resources! Rob Peter....Pay Paul?? The Opportunity Cost of Government Spending? Does this mean govt spending is a bad?

13 Economics in One Lesson Public Goods or just Goods Provided by/for the Public? Is it possible to exclude people who dont pay? Are there examples of this good or service being provided privately? Is it possible to exclude people who dont pay? Examples of private production? Would people be motivated to pay for the service if it was only provided privately?

14 Economics in One Lesson Public Goods or just publically-provided goods? True public goods are Non-rivalrous in consumption – One persons consumption doesnt reduce the amount available for others to consume Non-exclusive in production – The producer/provider cannot exclude people who do not pay (free riders) – Therefore, theres no incentive for private producers to provide the product

15 Economics in One Lesson Public Goods Public goods have characteristics that make it difficult for the private sector to produce them profitably (market failure?). With private goods, the focus is on the individual. With public goods, the focus is on groups.

16 Economics in One Lesson Public Goods Once a pure public good is supplied to one individual, it is simultaneously supplied to all. A private good is only supplied to the individual who bought it.

17 Economics in One Lesson Public Goods In the case of a public good, the social benefit of a public good is the sum of the individual benefits. But how do we know???

18 Economics in One Lesson Solutions to the Public Goods Problem A common solution is for the government to provide the good, but government is not the only solution. Other solutions are charities and advertising.

19 Economics in One Lesson Public Goods There are no pure examples of a public good. – The closest example is national defense. Technology can change the public nature of goods. – Roads are an example.

20 Economics in One Lesson Public or Private Production: The Guideline is the Same Private Production should take place when the marginal benefit exceeds the marginal cost. Government Production should take place when the marginal benefit exceeds the marginal cost.

21 Economics in One Lesson Example: National Defense Would you pay?

22 Economics in One Lesson What about health care?

23 Economics in One Lesson Asymmetric Information Asymmetric information – Exchange that occurs when one party has more information than the other is called – Adverse selection: the problem that occurs when higher-quality consumers or producers are driven out of the market because unobservable qualities are incorrectly valued.

24 Economics in One Lesson Solutions to Asymmetric Information Asymmetric information can cause markets to fail – to not allocate goods and services to their highest value use. A seller must provide credible information about the quality of the good. One approach is to devote considerable resourcesto spend moneyto demonstrate that the seller is credible. Another way to inform consumers of the quality of the product is to provide a guarantee against product defects

25 Economics in One Lesson The Impossibility Theorem The impossibility theorem is a proposition demonstrated by Kenneth Arrow showing that no system of aggregating individual preferences into social decisions will always yield consistent, nonarbitrary results.

26 Economics in One Lesson The Impossibility Theorem Preferences of Three Top University Officials VP1 prefers A to B and B to C. VP2 prefers B to C and C to A. The dean prefers C to A and A to B. OPTION AOPTION BOPTION C Hire more facultyNo changeReduce the size of the faculty Ranking 1XXX 2XXX 3XXX If A beats B, and B beats C, how can C beat A? The results are inconsistent. VP1 VP2 Dean

27 Economics in One Lesson The Voting Paradox The voting paradox is a simple demonstration of how majority-rule voting can lead to seemingly contradictory and inconsistent results. A commonly cited illustration of inconsistency described in the impossibility theorem. Results of Voting on Universitys Plans: The Voting Paradox VOTES OF: VoteVP1VP2DeanResult a A versus BABAA wins: A > B B versus CBBCB wins: B > C C versus AACCC wins: C > A a A > B is read A is preferred to B.

28 Economics in One Lesson Moral Hazard A related issue is moral hazardthe problem that arises when people change their behavior from what was expected of them when they engage in a trade or contract.

29 Economics in One Lesson Adam Smith and Efficiency Everyoneconsumers, firms, resource suppliersattempts to get the most benefits for the least cost. As Adam Smith noted in 1776, self-interested individuals, wholly unaware of the effects of their actions, act as if driven by an invisible hand to produce the greatest social good.

30 Economics in One Lesson An efficient use of resources implies a maximum value of output from a resource base. This is called technical efficiency. When one person cannot be made better off without making someone else worse off is called economic efficiency. Government can have neither. Government as the Guardian

31 Economics in One Lesson Protecting the Food Supply The FDA has issued a rule on the maintenance of records to ensure the Security of the U.S. Food Supply against Bioterrorism. It requires persons who manufacture, process, pack, transport, distribute, receive, hold, or import food to maintain records identifying the source of all food received, and the subsequent recipient of all food released.

32 Economics in One Lesson Lack of Competition Monopoly: a market with only one producer. If one firm controls production economic efficiency can suffer. Governments often regulate monopolies to ensure economic efficiency. Remember only government can create monopolies.

33 Economics in One Lesson Business Cycles Fluctuations in the economy impact employment rates and income. People call on the government to protect them against the periods of economic ill health and to minimize the damaging effects of business cycles. Business cycles create by money supply manipulation (only can be done by government)

34 Economics in One Lesson The Big Ideas from Lesson 21 1.Government interferes with wealth-producing, voluntary exchange and secure property rights. 2.The opportunity cost of government spending is private spending or what else could have been done. 3.Government has been proven to do nothing better than the private sector, thus are there any real public goods? 4.At best, government should be the referee to a superior game.

35 Economics in One Lesson We exist to bear witness. We had to be. The infinite needs us to see it. Without the perceiver, the perceived does not exist. That gives us leverage. Don't look until you get what you want.


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