Transcript Chapter 16
Micro McEachern ECON 2008-2009 16 CHAPTER Designed by Amy McGuire, B-books, Ltd. Chapter 16 Public Goods and Public Choice Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1 Private, Public Goods, and in Between LO1 Chapter 16 1. Private goods – Rival in consumption – Exclusive – Provided by private sector 2. Public goods – Nonrival in consumption – Nonexclusive – Provided by government Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 2 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 LO1 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 3 LO1 Exhibit 1 Categories of Goods Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 4 Optimal Provision of Public Goods Nonrival in consumption – Once produced: available to all consumers Market demand curve – Vertical sum of individual demand curves – Marginal benefit Efficient level of public good – Market D curve intersects MC curve LO1 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 5 LO1 Exhibit 2 Market for Public Goods Because public goods, once produced, are available to all in identical amounts, the demand for a public good is the vertical sum of each individual’s demand. The market demand for mosquito spraying (D) is the vertical sum of Maria’s demand, Dm, and Alan’s demand, Da. The efficient level :MC of mosquito spraying equals its marginal benefit; at point e, where the marginal cost curve intersects the market demand curve. Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 6 Paying for Public Goods Tax = marginal valuation – Free-rider problem • People try to benefit from the public goods without paying for them – Ability to pay LO1 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 7 Public Choice in Representative Democracy Public choices – Government decisions • Public goods • Taxes Median-voter model – The preference of the median voter will dominate other choices LO2 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 8 Special Interest and Rational Ignorance Elected officials: Maximize political support – Special interest rather than – Public interest • Asymmetry • Voters ‘rational ignorance’ LO2 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 9 Distribution of Benefits and Costs 1. Widespread benefits; widespread costs – Traditional public-goods legislation – Positive impact on economy • Total benefits > total costs 2. Concentrated benefits; widespread costs – Special-interest legislation – Harms the economy • Total costs > total benefits LO2 – Pork-barrel spending Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 10 Distribution of Benefits and Costs 3. Widespread benefits; concentrated costs – Populist legislation – Beneficiaries: rationally ignorant 4. Concentrated benefits; concentrated costs – Competing-interest legislation – Fierce political battles LO2 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 11 LO2 Exhibit 3 Categories of Legislation Based on the Distribution of Costs and Benefits Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 12 Case Study LO2 Farm Subsidies Chapter 16 The Agricultural Marketing Agreement Act, 1937 Prevent ‘ruinous competition’ One in four Americans: farm Floor prices 2007 One in fifty Americans: farm $18 billions a year Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 13 Case Study LO2 Farm Subsidies Chapter 16 To subsidize farmers, consumers pay Higher product price For the surplus (taxpayers) For storage (the government buys the surplus) E.g. milk Free market p=$1.50 Subsidized p=$2.50+$2.50+$0.50 Farmers: normal profit Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 14 LO2 Exhibit 4 Dollars per gallon Effect of Milk Price Supports Excess quantity supplied $2.50 1.50 D 0 Chapter 16 75 100 150 No government intervention: market price = $1.50 per gallon, and 100 million gallons are sold S per month. Government: floor price = $2.50 per gallon, quantity supplied increases and the quantity demanded decreases. To maintain the higher price, the government must buy the excess quantity at $2.50 per gallon. Millions of gallons per month Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 15 Rent Seeking Activity interest groups undertake – Secure special favors from government Political action committees Shift resources from production No incentive for economic efficiency LO2 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 16 Case Study LO2 Campaign Finance Reform Chapter 16 Special-interest money Soft money Hard money Money matters more to challengers Efforts to limit campaign spending Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 17 The Underground Economy Unreported market activity – To avoid taxes – Illegal Tax avoidance – Legal – Pay least possible tax Tax evasion – Illegal LO3 – No or fraudulent tax return Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 18 The Underground Economy Underground economy grows more – Government regulation increase – Tax rates increase – Government corruption widespread Estimated: $1.4 trillion in 2007 LO3 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 19 Bureaucracy in Representative Democracy Bureaus – Government departments, agencies Ownership – Taxpayers Funding – Government appropriation Less incentive to eliminate waste and inefficiency LO4 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 20 Bureaucracy in Representative Democracy Bureaucratic objectives – Serve the public – Maximize budget • Larger budget than desired by median voter LO4 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 21 Bureaucracy in Representative Democracy Private vs. public production – Private production – may be more efficient – Public production – preferred by public officials LO4 Chapter 16 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 22