[ 2.7 ] Public Goods and Externalities

[ 2.7 ] Public Goods and Externalities Learning Objectives Identify examples of public goods. Analyze market failures. Evaluate how the government allocates some resources by managing externalities.

[ 2.7 ] Public Goods and Externalities Key Terms public good public sector private sector infrastructure free rider market failure externality poverty threshold Welfare

Public Goods You benefit from all kinds of services that federal, state, and local governments provide. You go to school, ride on roads, cross bridges, and use public parks. What would your life be like without these services? Or suppose that you could use a specific road or bridge only if your family had helped pay for it. How much would that complicate your life?

Public Goods What Makes a Public Good Weighing Costs and Benefits Free-Rider Problem

Public Goods Mail delivery is a service government has provided since the earliest days in the nation’s history. Draw Conclusions Why do you think the federal government chose to provide this service rather than letting a private company do it?

Public Goods Public goods are created after a cost-benefit analysis like this one. Compare and Contrast Study the fictional event described here. Why was the Capp County bridge built as a public good rather than in the free market?

Market Failures Public goods are examples of what some economists call a market failure. The term does not suggest that the free enterprise system does not work. Rather, market failure describes a specific situation in which the free market, operating on its own, does not distribute resources efficiently.

Market Failures In the 1930s, utilities had no incentive to string electric lines to isolated areas. Government took on that task with the Rural Electrification Administration. Infer Why do you think the government was willing to help bring electricity to rural areas?

Externalities Out-of-state drivers can travel over roads that they did not pay to have built. Nonpayers as well as payers enjoy the environmental benefits of national parks. Both of these examples involve what economists call externalities. An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume. Externalities may be either positive or negative.

Externalities Positive Externalities Negative Externalities Government’s Goals Government-Driven or Market-Driven Solutions?

Externalities Building the Capp County bridge resulted in positive and negative externalities. Analyze Charts Explain how businesses are both helped and hurt by the building of the bridge.

Externalities Air pollution and water pollution created by factories such as these are negative externalities.

The Poverty Problem You’ve seen it all around you: on TV shows, in the news, maybe even in your community. There are vast differences between people who have a lot of money, enough money, and very little money. On the average, Americans enjoy a high standard of living. Yet about 15 percent of Americans live in poverty. And for people under the age of 18, the percentage is even higher.

The Poverty Problem The Government’s Role The Welfare System

The Poverty Problem This sign announces that shoppers can use an EBT card—food stamps—to pay for their purchases. Food stamps are an example of a government program that redistributes wealth.

Quiz: Public Goods What is one reason that local law enforcement is considered a public good? A. Everyone in the community benefits from it. B. Nobody in the community has to pay for it. C. Private firms make a profit from producing it. D. Individual citizens pay directly for it.

Quiz: Market Failures Public goods are examples of market failure, because producing these goods in the free market A. shows that the free enterprise system cannot distribute resources. B. helps entrepreneurs learn how to distribute public resources. C. does not allow for the efficient distribution of resources. D. encourages private businesses to distribute resources efficiently.

Quiz: Externalities Which of the following is an example of a positive externality resulting from an outdoor band concert? A. A pair of endangered birds leave their nest in a nearby tree when the concert starts. B. An elderly woman in her apartment hears a song that she liked as a child. C. A pizza parlor closes early, because all of its customers are at the concert. D. A traffic jam occurs as drivers hunt for parking spots near the concert.

Quiz: The Poverty Problem The goal of government welfare programs is to A. eliminate the dependence of people on the welfare system. B. maintain a poverty threshold that matches the median income. C. eliminate the income gap between the richest Americans and the poorest. D. raise the standard of living of certain less-fortunate members of society.