Public Goods

 Market Failure = when a market fails to deliver an efficient allocation of resources  Economists have determined that there are 3 main reasons why a market might fail 1.Presence of Externalities (Spillovers) 2.Presence of imperfect information 3.The Provision of Public Goods Market Failure

 A public good = a good or service that can not be provided to one person, without also being provided to another  A public good has two characteristics:  Nonrivalry  Nonexcludability Public goods

Nonrivalry = More consumption of a good by one person does not mean less consumption of the same good by someone else  Example: national defense system  The moment a child is born, she benefits from the national defense system without anyone else having to give it up  Example of a good with rivalry in consumption: Hamburgers  If you eat one, that means there is one less for everyone else (or more burgers must be made) Nonrivalry

Nonexcludability = One person can not exclude others from consuming a good  For example: National Defense.  In contrast, most goods have the characteristic of excludability  Example: Hamburgers. If you don’t pay for it, the server won’t give it to you  Can you think of a good that satisfies both nonrivalry, and nonexcludability? Nonexcludability

 In the case of public goods, even those who have not contributed to the provision of the good or service can still benefit from it  For example, everyone benefits from the protection provided by the police.  One person’s protection does not come at the expense of another’s  No one can be excluded from enjoying the protection  Therefore, it would be difficult for a private company to provide this service.  How would you bill your customers?  Therefore, the government provides the public good, and taxes all citizens to cover costs Free-Rider Problem

 Not all public goods are provided by the government and paid for through taxes  The classic example is lighthouses used to warn ships of the shoreline  Why would this be considered a public good?  Early lighthouses were built by private shipping firms  They collected user fees from ships that made it to any nearby port  Therefore, the free-rider problem was avoided, and a general tax was not needed  Some other examples of user fees are national parks Free-Rider Problem

 Both of the following are examples of public goods  Radio  Satellite Television  They satisfy both of the criteria: nonrivaly and nonexcludability  However, they are both produced primarily by private firms  How do these firms avoid the free-rider problem? Free-Rider Problem

 Just because a good is produced by the government, it does NOT make it a public good.  For example: education.  Additional students might actually reduce the education of students already in the class.  There are ways to exclude people from education  However, education is often discussed as a public good in certain contexts  For an economist, to be considered a public good it MUST satisfy the two main criteria Government and Public Goods

 Assume that a certain good or service IS a public good, how will the government decide how mush of it to produce, or if it should be produced at all?  Which key economic principle do economists use? = Marginal Principle!  The government must compare the costs and benefits of providing the public good Government and Public Goods

 Consider: A city government must decide whether or not to increase the size of it’s police force  Marginal Benefit …  The reduction in loss of life and property  Marginal Cost …  The increase in police payroll  Simply apply the marginal principle. If the benefit > cost, then increase the police force  BUT, measuring the marginal benefit is often very difficult to do for public goods Government and Public Goods

 How could you measure the marginal benefit people in a city receive from police services?  Brainstorm a list of as many ways as possible  One way is called contingent valuations  = discover people’s willingness to pay through surveys, polls, and questionnaires  Not always reliable, since people may not give an accurate estimate of their willingness to pay (especially if they never have to actually pay for it) Government and Public Goods

 Choose one of the public goods listed below, and write a creative short story that describes a future world where the public good does not exist.  Police Services  Road Construction  Clean Air  Your short story must include the following elements  Explain why this good is considered public  Describe why the public good no longer exists  Describe the potential consequences for you and other citizens of the future world now that this good is no longer provided Activity