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Property Rights and Public Goods. Overview Externalities and Property Rights –Recycling Common Property Resources Public Goods & Private Preferences for.

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Presentation on theme: "Property Rights and Public Goods. Overview Externalities and Property Rights –Recycling Common Property Resources Public Goods & Private Preferences for."— Presentation transcript:

1 Property Rights and Public Goods

2 Overview Externalities and Property Rights –Recycling Common Property Resources Public Goods & Private Preferences for Public Goods Benefit-cost Analysis Public Choice Process

3 The Efficient Amount of Recycling Scrap Cost MCR MSC m* With a refundable deposit, MC increases and MC = MSC = MCR. MC + per unit refund MC m1m1 Without market intervention the level of scrap will be at m 1 and m 1 > 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

4 Refundable Deposits Amount of Glass $ D Price falls to P and the amount of recycled glass increases to M*. SvSv SrSr S The supply of glass S is the horizontal sum of the Supply of virgin glass ( S v ) and the supply of recycled glass ( S r ). M1M1 P Without refunds the price of glass is P and S r is M 1. SrSr S P M* With refunds S r increases to S r and S increases to S.

5 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.

6 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 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.

7 Coase Theorem MC of pollution to fisheries MC of pollution abatement by factory Pollution Abatement A C B E O O F L X OE is optimal quantity of pollution and OE 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 for abatement now higher to facilitate pollution reduction

8 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 – Wouldnt private ownership be impractical?

9 Common Property Resources Fish per Month Benefits, Costs ($ per fish) Demand However, private costs underestimate true cost. The efficient level of fish/month is F* where MSC = MB (D) Marginal Social Cost F* Private Cost FCFC Without control the number of fish/month is F C where PC = MB (marginal benefit).

10 Crawfish Fishing in Lousiana Finding the Efficient Crawfish Catch –F = crawfish catch in millions of pounds/yr –C = cost in dollars/pound Demand –C = = F MSC –C = F PC –C = F Efficient Catch –9.2 million pounds –D = MSC

11 Crawfish Catch (millions of pounds) C Cost (dollars/pound) Demand Marginal Social Cost Private Cost Crawfish as a Common Property Resource

12 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

13 Typology of Goods Characteris- tics Excludable Non- excludable RivalPrivate Good Common Property Resource Non-rivalClub GoodPublic Good

14 D1D1 D2D2 D When a good is non-rival, the social marginal benefit of consumption (D), is determined by vertically summing the individual demand curves for the good. Efficient Public Good Provision Output 0 Benefits (dollars) $4.00 $5.50 $7.00 Marginal Cost $1.50 Efficient output occurs where MC = MB at 2 units of output. MB is $ $4.00 or $5.50. Horizontal sum of demand curves What if this is the MC curve?

15 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?

16 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.

17 The Demand for Clean Air Nitrogen Oxides (pphm) 0 Dollars Low Income Middle Income High Income

18 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.

19 Exercise 7, p.653: Willingness to pay for different quantities of the public good Time G-1 G-2 G-3 V.Sum

20 Exercise 7, p.653: Willingness to demand the private good at different prices Price G-1 G-2 G-3 H.Sum

21 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

22 Public Choice Process Broad groups Major characteristics 1. VotersVoting 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. PoliticiansAs 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

23 Public Choice Process Broad groups Major characteristics 3. 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

24 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.

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