1. Public Goods

2.  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

3.  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

4. 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

5. 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

6.  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

7.  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

8.  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

9.  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

10.  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

11.  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

12.  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

13.  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