Public Goods and Common Resources Chapter 11 Public Goods and Common Resources

Some Questions to Consider How big, exactly, should government be? What goods and services should government provide? How should government raise revenue?

Another Question How should the various powers of government be apportioned to local, state, and federal levels?

Government Provision of Public Goods Public Good: A good or service that is both nonrival and nonexcludable. Nonrival: consumption by one person does not diminish its availability for others. Nonexcludable: difficult to exclude nonpayers from consuming. Example: Defense Street Lighting

Public Goods are a form of Market Failure Public Goods can not be provided the free market. The Government has to do it. Why? Everyone gets to consume the good whether they pay for it or not. So why pay?

The Free Rider Problem A free rider is a person who receives the benefit of a good but avoids paying for it. The Government must force us to pay for the military or many of us would free-ride. Group projects

Are Libraries a Public Good? The Government builds libraries. Are libraries naturally a nonrival good? No. If someone has a book checked out I can’t check it out at the same time. Are libraries nonexclusive? No. You could have a private library and excluded people. Libraries are not a true public good.

What about parks? Are parks naturally a nonrival good? No, they can get crowded. Are parks nonexclusive? Disneyland excludes people who don’t pay.

Parks aren’t a true public good either. You could have a nice park and charge people to use it simply by putting a fence around it.

What about Roads and Highways? Are roads a nonrival good? No. Been on the 405 lately? Are roads and highways nonexclusive? Maybe not. There are roads you have to pay to use or you aren’t allowed access.

Highways and Roads Are Not True Public Goods Even so, there may be reasons why the government should be involved. What if private companies built different roads to the same place? It would use up a lot of land that could be used for other purposes, such as housing. What if only one firm built a road? Then it’s a monopoly.

Why Does the Government Provide So Many Non-Public Goods? Public Libraries give everyone the chance to learn and be informed. Why does the government like to provide all kinds of goods and services that could be provided more efficiently by the private sector? The Government needs to justify all the taxes they collect and all the people they have on the payroll.

DIFFERENT KINDS OF GOODS Private Goods Are both excludable and rival. Public Goods Are nonexcludable and nonrival. Common Resources Are rival but nonexcludable. Natural Monopolies Are excludable but nonrival

Figure 1 Four Types of Goods Rival? Yes No Private Goods Natural Monopolies • Ice-cream cones Clothing Congested toll roads • Fire protection Cable TV Uncongested toll roads Yes Excludable? Common Resources Public Goods • Fish in the ocean The environment Congested nontoll roads • Tornado siren National defense Uncongested nontoll roads No Copyright © 2004 South-Western

Government Provision of Public Goods Not everyone benefits equally from a public good or service. Therefore, some argue that the most equitable way to pay for the public good or service is to tax people in proportion to their willingness to pay.

Government Provision of Public Goods Head Tax A tax that collects the same amount from every taxpayer Regressive Tax A tax under which the proportion of income paid in taxes declines as income rises. Proportional Income Tax One under which all taxpayers pay the same proportion of their incomes in taxes Progressive Tax One in which the proportion of income paid in taxes rises as income rises.

Government Provision of Public Goods While the head tax rule is ideal in the efficiency dimension, critics charge that it could become a major source of revenue for the government. The government would have an incentive to create phony public goods in order to increase taxes. Maybe this happens regardless of what kind of tax the government charges.

The Optimal Quantity of a Public Good One-size-fits-all approach will not satisfy everyone’s demand for public goods Many people may oppose mandatory taxation. Government may not know people’s true preferences. (Squeaky wheel syndrome)

Private Provision of Public Goods Alternatives to using taxes to fund public goods: Development of new means to exclude nonpayers Private contracting

Local, State, or Federal Gov’t? Advantages of local and state government: Better communication and response to the citizens Local choices will reflect the unique preferences of the residents Advantages of federal government: Economies of scale in defense spending Positive and negative externalities may be nationwide

The Economics of Politics “Pork Barrel Spending” A public expenditure that is larger than the total benefit it creates, but that is favored by a legislator because his or her constituents benefit from the expenditure by more than their share of the resulting extra taxes

Sources of Inefficiency in the Political Process Logrolling The practice whereby legislators support one another’s legislative proposals Rent-Seeking The socially unproductive efforts of people or firms to win a prize.

Rent-Seeking Inefficiency occurs when: The gains from a government program are concentrated in the hands of a few beneficiaries. The costs are spread among many.

Rent-Seeking Example Assume Price support bill will raise sugar prices by $0.10/lb. Average American consumes 100 pounds of sugar per year. Demand for sugar is inelastic

Sources of Inefficiency in the Political Process Why don’t citizens vote out legislators who support such bills? Rational ignorance Free riders Even though this is a hugely inefficient way to redistribute income (in this case, from sugar consumers to domestic sugar producers), it is exactly what the government does.

Problems peculiar to Government Bureaucracy and politicking Slow decisions, not always rational outcomes Rent seeking Lack of Information Don’t know costs or benefits as well as firms or consumers do Restriction on choice Any laws to alter market outcomes require some sort of restriction

The Moral to this Story: Government is an alternative, not the solution. Don’t rule out government intervention dogmatically But don’t automatically assume it can fix things Economic theory helps us predict when government intervention will work.