1. Chapter 16 Public Goods and Public Choice © 2009 South-Western/ Cengage Learning

2. Private, Public Goods, and in Between 1.Private goods –Rival in consumption –Exclusive –Provided by private sector 2.Public goods –Nonrival in consumption –Nonexclusive –Provided by government 2

3. Private, Public Goods, and in Between 3.Natural monopoly –Nonrival but exclusive –With congestion: private goods –Provided by private sector or government 4.Open-access good –Rival but nonexclusive –Regulated by government 3

4. Exhibit 1 Categories of goods 4

5. Public Goods Nonrival in consumption –My consumption of the good does not alter the amount available for your consumption Nonexclusion –Once produced, no one can be excluded from consuming the good 5

6. Public Goods Market demand curve –Vertical sum of individual demand curves Add up the prices people are willing to pay to consume various quantities –Marginal benefit Efficient level of public good –Market D curve intersects MC curve 6

7. Paying for Public Goods Free Market –Free-rider problem People try to benefit from the public goods without paying for them Market demand does not accurately reflect marginal benefit if people understate benefit 7

8. Paying for Public Goods Government Tax = marginal valuation –Free-rider problem –Ability to pay 8

9. Public Choice Theory Study of how people use the institutions of government in pursuit of self-interest “Game” –Players pursue self-interest Consumers maximize utility Producers maximize profit –Interact in markets Disagreements arise Market failure Role for government exists 9

10. Public Choice in Direct Democracy People affected by a policy vote individually on the policy –Town hall meetings –Ballot propositions in California –Not predominant form of government in US 10

11. How are decisions made? Median-voter model –The preference of the median voter will dominate other choices –Helps explain why politicians focus on median voters 11

12. Public Choice in Representative Democracy People vote for representatives who make the decisions of government –Predominant form of government in US Public choices –Government decisions Provide public goods Set taxes Determine and enforce rules 12

13. Public Choice in Representative Democracy Democratic system vs market –Similarities Voting in market Politicians use similar techniques as business –Advertising –PR –Differences How often do we vote? markets vs politics Variety? 13

14. Public Choice in Representative Democracy Besides voting how can we express our opinions to politicians? –writing –calling –picketing –lobbying –special interest groups 14

15. Public Choice in Representative Democracy How are decisions made –Majority rule –Logrolling Vote trading Promotes local interests at the expense of national Expresses preferences that are strongly held by a minority and only slightly opposed by majority 15

16. Special Interest and Rational Ignorance Elected officials: Maximize political support –Special interest rather than –Public interest Asymmetry Voters ‘rational ignorance’ 16

17. Distribution of Benefits and Costs 1.Widespread benefits; widespread costs –Optimal amount produced MB = MC for all –Traditional public-goods legislation 2.Concentrated benefits; widespread costs –Too little produced MB < MC for too many –Special-interest legislation –Pork-barrel spending Total costs > total benefits 17

18. Distribution of Benefits and Costs 3.Widespread benefits; concentrated costs –Too much produced MB > MC for many –Populist legislation 4.Concentrated benefits; concentrated costs –Competing-interest legislation –Fierce political battles –Who can tell how much produced! 18

19. Exhibit 3 Categories of legislation based on the distribution of costs and benefits 19

20. Rent Seeking An economic rent is a payment to a factor of production in excess of its opportunity cost Special interest groups seek “rent” –Secure special favors from government –Political action committees –Shift resources from production –No incentive for economic efficiency 20

21. Public Choice Theory Shows choices that would be made under certain distributions of costs and benefits Caution on government’s role to correct market failure –government provision might reduce inefficiency –government provision might increase inefficiency 21