Presentation on theme: "Lesson 21: Government and Public Goods"— Presentation transcript:
1Lesson 21: Government and Public Goods InterventionsLesson 21: Government and Public Goods
2The Rules of the GameRule 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.
3What Should Government Do? Limited power of central governmentLife, liberty, pursuit of happiness (self interest, profit)Establish and enforce protection of property rightsGovernment should do what citizens cannot do!
4Private vs. Public Sectors The private sector is made up of households, businesses, and the international sector.Producers and ConsumersThe public sector refers to activity by the various levels of government.Consumers and Thieves
5Optimal Provision of Public Goods With private goods, consumers decide what quantity to buy; market demand is the sum of those quantities at each price.
6Optimal 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.
7Optimal Production of a Public Good The optimal level of provision for public goods means producing as long as society’s total willingness to pay per unit D(A+B) is greater than the marginal cost of producing the good.
8The Economic Functions of Government Enforce Laws and ContractsProtect Private Property
9The Economic non-Functions of Government Maintain CompetitionRedistribute IncomeProvide an Economic Safety NetProvide Public GoodsNonexclusionShared consumptionCorrect Market FailuresProvide market informationCorrect negative externalitiesSubsidize goods with positive externalitiesStabilize the EconomyFight unemploymentEncourage price stabilityPromote economic growthNone of these are the functions of true government
10All caused by Government Market Failures?Public Goods and Bads (Externalities)Asymmetrical InformationMoral HazardRule ViolationsMonopoliesBusiness CyclesAll caused by Government
11How do we evaluate government’s role in the economy? “Government should do those things people cannot do for themselves.” Abraham Lincoln
12The Opportunity Cost of Government Spending? 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??Does this mean gov’t spending is a “bad”?
13Public Goods or just Goods Provided by/for the Public? MB > MC ??Is it possible to exclude people who don’t pay?Examples of private production?Would people be motivated to pay for the service if it was only provided privately?Is it possible to exclude people who don’t pay?Are there examples of this good or service being provided privately?
14Public Goods or just “publically-provided” goods? MB > MCPublic Goods or just “publically-provided” goods?“True” public goods areNon-rivalrous in consumptionOne person’s consumption doesn’t reduce the amount available for others to consumeNon-exclusive in productionThe producer/provider cannot exclude people who do not pay (“free riders”)Therefore, there’s no incentive for private producers to provide the product
15Public GoodsPublic 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.
16Public GoodsOnce 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.
17Public GoodsIn 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???
18Solutions 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.
19Public 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.
20Public 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.≥MB MC
23Asymmetric Information Exchange that occurs when one party has more information than the other is calledAdverse selection: the problem that occurs when higher-quality consumers or producers are driven out of the market because unobservable qualities are incorrectly valued.
24Solutions 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 resources—to spend money—to 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
25The 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.
26The Impossibility Theorem Preferences of Three Top University OfficialsVP1 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 CHire more facultyNo changeReduce the size of the facultyRanking1X23VP1VP2DeanIf A beats B, and B beats C, how can C beat A? The results are inconsistent.
27The Voting ParadoxThe 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 University’s Plans: The Voting ParadoxVOTES OF:VoteVP1VP2DeanResult aA versus BABA wins: A > BB versus CCB wins: B > CC versus AC wins: C > AaA > B is read “A is preferred to B.”
28Moral HazardA related issue is moral hazard—the problem that arises when people change their behavior from what was expected of them when they engage in a trade or contract.
29Adam Smith and Efficiency Everyone—consumers, firms, resource suppliers—attempts 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.
30Government as the Guardian 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.
31Protecting 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.
32Lack 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.
33Business CyclesFluctuations 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)
34The “Big Ideas” from Lesson 21 Government interferes with wealth-producing, voluntary exchange and secure property rights.The opportunity cost of government spending is private spending or what else could have been done.Government has been proven to do nothing better than the private sector, thus are there any real public goods?At best, government should be the referee to a superior game.
35We 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.