Topic 9: Government & Environment A. Government Role: Law and Order B. Government Role: Income Redistribution C. Government Role: Market Failure D. Market Failure Example: Environmental Economics

A. Government Role – Law and Order Modern economies only operate and grow if PROPERTY RIGHTS are guaranteed:  People need to be able to own property  People need to be able to earn income to purchase property, and be able to sell property  Property ownership needs to be guaranteed from external threats

A. Law and Order If NOTHING ELSE, the government is responsible to ensure Property Rights through: 1)A legal system  Allowing for ownership of property, buying and selling  To enforce these laws with appropriate punishments 2)A police force  To protect property ownership and support the legal system

A. Law and Order 3) A military  To protect local property owners from outside interference Even if the economy runs “perfectly”, a government is still needed.

B. Government Role – Income Redistribution Governments are often required to balance EFFICIENCY and EQUITY Efficiency – society’s resources are used to produce the maximum amount of goods (that people want) Equity – society’s output is divided “fairly”  Fairly could be interpreted as: a)Equally b)According to need c)According to effort

B. Income Redistribution Governments have a variety of programs that seek to enhance equity (often at the cost of efficiency):  Unemployment Insurance  GST credit, Child Tax Benefit, and other Welfare Programs  Pensions  Subsidized Healthcare  Subsidized Educations  And others…

B. Income Redistribution Although income redistribution often reduces efficiency, it benefits society for a variety of reasons: 1)Insurance  Many of these programs act as large-scale income insurance  Premiums (taxes) are paid now  Benefits are paid out if your income drops (due to unemployment, illness, triplets, failed retirement investments, etc.

B. Income Redistribution 2) Altruism  People feel good when they help others who need help  It is costly and difficult to identify those who need help and give the help they need  The government can often offer help on a larger scale and more efficiently than individuals

B. Income Redistribution 3) Fairness  Many people value fairness  Everyone should be on an equal playing field  It is simple chance if someone is born into a rich family or a poor family; if someone develops diabetes; if one of two identical workers lose their jobs  Income redistribution aims to enhance fairness

B. Income Redistribution 4) Social Stability  High income differences lead to social instability, causing inefficiency and (in extreme cases) revolution  The poor resent the rich, and have an incentive to be less productive or destructive to achieve “fairness”  The rich fear the angry poor, and (mis)allocate resources to security and policing

C. Government Role – Market Failure IF A market is a perfectly competitive (in buyers and sellers)THEN The market maximizes efficiencyTHEREFORE The government should NOT intervene

C. Market Failure BUT Markets are often NOT Perfectly Competitive; there is often Market Failure: 1)Market Power 2)Public Goods 3)Asymmetric Information 4)Externalities

C.1 Market Power If a firm has some degree of market power, there is not perfect competition (ie: Monopolies, Oligopolies, Monopolistic Competition). In these cases, government intervention could be required (topic 5b):  Merger Prevention  False Advertising Prevention  Predatory Pricing Prevention  Bait and Switch Prevention  Price and Output controls, etc.

C.2 Public Goods A PRIVATE GOOD has two features: 1)Rival – once consumed, another person cannot consume it 2)Excludable – others can be prevented from consuming it Food (ie: pizza or sushi) is a good example of a private good. Once I eat it, it’s gone and you’re left hungry.

C.2 Public Goods A PURE PUBLIC GOOD has two features: 1)Nonrival – once provided, another person can consume it at no additional cost 2)Nonexcludable – once provided, it is impossible or highly expensive to prevent anyone from consuming it

C.2 Public Goods National Defense is a good example of a pure public good: 1)Nonrival – all Canadians benefit 2)Nonexcludable – it’s impossible to prevent a Canadian from benefitting Other examples: Conventional Radio, A Beautiful View, A Canada-Wide Sunglass dome designed to block harmful sun rays (Canadome)

C.2 Public Goods An IMPURE PUBLIC GOOD is either: 1)Nonrival – (examples – a public pool, a gated national park, an art gallery) or 2) Nonexcludable – (examples: fish in a lake, wildlife, my office hours) To some extent

C.2 Public Goods Pure Public Goods (and many Impure Public Goods) should be provided by the government through: a)Government production b)Government provision (and private production) Due to: a)Scale constraints b)The Free Rider Problem

C.2 Public Goods – Scale Constraints Many public goods are large projects that would require too many individuals to work together to produce. (examples: Rocky Mountain National Park, TransCanada highway)  The government has the size required to pool resources for these projects

C.2 Public Goods – Free Rider Problem If a public good is provided privately, its efficiency depend on how people represent their willingness to pay -For private goods, people have no incentive to misrepresent their willingness to pay -if the price is $10, and that lies in their willingness to pay, they will pay the $10, consume the good and be happy

C.2 Public Goods – Free Rider Problem -For public goods, people have an incentive to misrepresent their willingness to pay -if the price is $10, a person could: a) hope someone else pays the price, then they get to enjoy it b) Claim their willingness to pay is lower (ie: $2), then enjoy it when others pay the difference =>they are a FREE RIDER

C.2 Free Rider Examples 1)At an alligator reserve, people can pay money to throw meat into the water to feed the alligators. Many people wait for someone else to buy and throw the meat. 2)If a community shares a park, residents may wait for someone else to mow the lawn/pick up waste before they use it. 3)Your roommate may claim (s)he’s not interested in cable TV/Pizza, then after you buy it they watch/eat.

C.2 Public Goods – Free Rider Problem When the government provides Public Goods: 1)Everyone is taxed (forced to pay) 2)Everyone can benefit The free rider problem is avoided.

24 Efficient Provision of PUBLIC GOODS -Consider Maka and Susan’s individual demands for a public good: Youtube -Youtube shows are nonrival and nonexcludable; one person’s consumption doesn’t affect anothers’ -The key difference in a public good is that BOTH can consume a purchased good; it is not used up -This results in a VERTICAL SUMMATION to calculate willingness to pay

25 2 MakaSusan Market demand 4 10 QQ Q PPP Maka is willing to pay $4 each for 2 youtube shows, and Susan is willing to pay $7 each, therefore the market is willing to pay $11 each

26 2 MakaSusan Market demand 4 10 QQ Q PPP The market Supply gives an equilibrium quantity of 3. Here price paid in the market ($6) is the sum of Maka’s payment ($2) and Susan’s payment ($4) S 6 4 2

27 Efficient Provision of Public Goods  Public goods should therefore be provided until the point where the marginal cost of the good is equal to the sum of marginal benefits