To do today. Ariely ques0ons. Chapter 16 in text: Public choices and public goods

Transcription

1 To do today Ariely ques0ons Chapter 16 in text: Public choices and public goods

2 Choices governments make Why Governments Exist 1. Establish and maintain property rights. 2. Provide nonmarket mechanisms for alloca0ng scare resources. 3. Implement arrangements that redistribute income and wealth.

3 Political Marketplace Voters express their demand via votes. Voters and firms express their demand for policies via campaign contributions. Politicians express their supply of policies with proposals which they hope will attract votes. Who chooses

4 What is the essential difference between: A city police department and Brink s security? Fish in the Atlantic Ocean and fish in a fish farm? A live concert and a concert on television? Public goods

5 Classifica0on of goods These and all goods and services can be classified according to whether they are excludable or nonexcludable and rival or nonrival.

6 Excludable and nonexcludable goods Excludable: only the people who pay for it are able to enjoy its benefits. Brink s security services, East Point Seafood s fish, and a Coldplay concert are examples. Nonexcludable: it is impossible (or extremely costly) to prevent anyone from benefiting from it. The services of the LAPD, fish in the Pacific Ocean, and a concert on network television are examples.

7 Rival and non-rival Rival A good is rival if one person s use of it decreases the quan0ty available for someone else. A Brink s truck can t deliver cash to two banks at the same 0me. A fish can be consumed only once. Nonrival A good is nonrival if one person s use of it does not decrease the quan0ty available for someone else. The services of the LAPD and a concert on network television are nonrival.

8 Four way classification Private Goods A private good is both rival and excludable. A can of Coke Public goods A public good is both nonrival and nonexcludable. Can be consumed simultaneously by everyone, and no one can be excluded from its benefits. National defense

9 Common resources Rival and nonexcludable. A unit of a common resource can be used only once, but no one can be prevented from using what is available.

10 Common resources Ocean fish are a common resource. They are rival because a fish taken by one person isn t available for anyone else. They are nonexcludable because it is difficult to prevent people from catching them.

11 Natural monopoly goods Nonrival and excludable. Special case: when the good or service can be produced at zero marginal cost. Such a good is nonrival. If it is also excludable, it is produced by a natural monopoly. The Internet and cable television are examples.

12 Four way classification

13 Mixed goods and externalities Private good the production or consumption of which creates an externality.

14 External benefits and costs Mixed Goods with External Benefits Mixed Goods with External Costs

15 Market failure, inefficiency and public choices hmp:// blogs.villagevoice.com /runninscared/ 2011/07/ seneca_village_centra l_park.php Public choices must be made to Provide public good and mixed goods Conserve common resources Regulate natural monopoly

16 Free-rider problem Public goods create a free-rider problem the absence of an incentive for people to pay for what they consume.

17 Free rider problem A free rider enjoys the benefits of a good or service without paying for it. Because no one can be excluded from the benefits of a public good, everyone has an incentive to free ride.

18 Valuing public and private goods The value of a private good is the maximum amount that a person is willing to pay for one more unit of it. The value of a public good is the maximum amount that all the people are willing to pay for one more unit of it.

19 Valuing public goods Same concepts as for private goods To calculate the value placed on a public good as well as a private good use the concepts of total benefit and marginal benefit.

20 Benefit from a public good Total benefit : dollar value that a person places on a given quantity of a good. Increases with the quantity of the good. Marginal benefit (MB): theincrease in total benefit that results from a one-unit increase in the quantity of a good. - Decreases with the quantity of the good.

21 Providing Public Goods The marginal social benefit curve for a public good contrasts with the demand curve for a private good, which is the horizontal sum of the individual demand curves at each price.

22 Providing Public Goods The marginal social cost of a public good is determined in the same way as that of a private good. The efficient quantity of a public good is the quantity at which marginal social benefit equals marginal social cost.

23 Equilibrium between MSB and MSC

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25 Providing public goods Inefficient Private Provision If a private firm tried to produce and sell a public good, almost no one would buy it. The free-rider problem results in too little of the good being produced by a private firm.

26 Providing Public Goods Efficient Public Provision The government can tax all the consumers of the public good and force everyone to pay for its provision Thus, public provision overcomes the freerider problem.

27 But politicians decide Principle of Minimum Differentiation The attempt by politicians to appeal to a majority of voters leads them to the same policies an example of the principle of minimum differentiation. The tendency for competitors (including political parties) to make themselves similar so as to appeal to the maximum number of clients (voters). (The same principle applies to competing firms such as McDonald s and Burger King).

28 And we have bureaucrats Objective of Bureaucrats (by assumption) Bureaucrats want to maximize their department s budget. A bigger budget increases their status and power. Bureaucrats might try to persuade politicians to provide more than the efficient quantity.

29 MC, MB and rational ignorance Rational ignorance is the decision by a voter not to acquire information about a policy or provision of a public good because the cost of doing so exceeds the expected benefit.

30 Consequences of ra0onal ignorance For voters who consume but don t produce a public good, it is rational to be ignorant about the costs and benefit. For voters who produce a public good, it is rational to be well informed. When the rationality of uninformed voters and special interest groups is taken into account, the political equilibrium results in overprovision of a public good.

31 Too many F-16s? If rationally ignorant voters enable the bureaucrats to achieve their goal of maximizing their budget, the public good might be overprovided and a deadweight loss created.

32 Providing Mixed Goods with External Benefits Private Benefits and Social Benefits A private benefit is a benefit that the consumer of a good or service receives. Marginal private benefit (MB) is the private benefit from consuming one more unit of a good or service. An external benefit is a benefit that someone other than the consumer receives.

33 Providing Mixed Goods with External Benefits Marginal external benefit is the benefit from consuming one more unit of a good or service that people other than the consumer enjoy. Marginal social benefit is the marginal benefit enjoyed by the entire society by the consumer and by everyone else on whom the benefit falls. Marginal social benefit is the sum of marginal private benefit and marginal external benefit. That is: MSB = MB + Marginal external benefit.

34 Why subsidize educa0on?

35 Why subsidize education? Marginal external benefit is shown by the vertical distance between the MB and MSB curves. Shows how much the good (for example education) provides a benefit to those other than the private individual (here the student) who consumes it

36 Subsidizing is efficient

37 Subsidizing education is efficient A private market underproduces an item that generates an external benefit and creates a deadweight loss.

38 Ariely ques0ons Why if free (zero) special and how does it affect ra0onal behavior? (Consider the Halloween chocolate and the credit card examples.) Why do social norms conflict with being paid for some ac0vi0es (Thanksgiving dinner!) and what are the implica0ons for ra0onal behavior?