Chapter 11

Public Goods and Common Resources

Some Questions to Consider

How big, exactly, should government be?What goods and services should

government provide?How should government raise revenue?

Another Question

How should the various powers of government be apportioned to local, state, and federal levels?

Government Provisionof Public Goods

Public Good: A good or service that is both nonrival and nonexcludable.

Nonrival: consumption by one person does not diminish its availability for others.

Nonexcludable: difficult to exclude nonpayers from consuming.

Example: DefenseStreet Lighting

Public Goods are a form of Market Failure

Public Goods can not be provided the free market. The Government has to do it.

Why?Everyone gets to consume the good

whether they pay for it or not.So why pay?

The Free Rider Problem

A free rider is a person who receives the benefit of a good but avoids paying for it.

The Government must force us to pay for the military or many of us would free-ride.

Group projects

Are Libraries a Public Good?

The Government builds libraries. Are libraries naturally a nonrival good?No. If someone has a book checked out I

can’t check it out at the same time.Are libraries nonexclusive?No. You could have a private library and

excluded people.Libraries are not a true public good.

What about parks?

Are parks naturally a nonrival good?No, they can get crowded.Are parks nonexclusive?Disneyland excludes people who don’t

pay.

Parks aren’t a true public good either.

You could have a nice park and charge people to use it simply by putting a fence around it.

What about Roads and Highways?

Are roads a nonrival good?No. Been on the 405 lately?Are roads and highways nonexclusive?Maybe not. There are roads you have to

pay to use or you aren’t allowed access.

Highways and Roads Are Not True Public Goods

Even so, there may be reasons why the government should be involved.

What if private companies built different roads to the same place?

It would use up a lot of land that could be used for other purposes, such as housing.

What if only one firm built a road?Then it’s a monopoly.

Why Does the Government Provide So Many Non-Public Goods?

Public Libraries give everyone the chance to learn and be informed.

Why does the government like to provide all kinds of goods and services that could be provided more efficiently by the private sector?

The Government needs to justify all the taxes they collect and all the people they have on the payroll.

DIFFERENT KINDS OF GOODS

Private GoodsPrivate Goods Are both excludable and rival.

Public GoodsPublic Goods Are nonexcludable and nonrival.

Common ResourcesCommon Resources Are rival but nonexcludable.

Natural MonopoliesNatural Monopolies Are excludable but nonrival

Figure 1 Four Types of Goods

Copyright © 2004 South-Western

Rival?

Yes

Yes

• Ice-cream cones• Clothing• Congested toll roads

• Fire protection• Cable TV• Uncongested toll roads

No

Private Goods Natural Monopolies

No

Excludable?

• Fish in the ocean• The environment• Congested nontoll roads

• Tornado siren• National defense• Uncongested nontoll roads

Common Resources Public Goods

Government Provision of Public Goods

Not everyone benefits equally from a public good or service.

Therefore, some argue that the most equitable way to pay for the public good or service is to tax people in proportion to their willingness to pay.

Government Provision of Public Goods

Head Tax A tax that collects the same amount from every taxpayer

Regressive Tax A tax under which the proportion of income paid in taxes

declines as income rises. Proportional Income Tax

One under which all taxpayers pay the same proportion of their incomes in taxes

Progressive Tax One in which the proportion of income paid in taxes

rises as income rises.

Government Provision of Public Goods

While the head tax rule is ideal in the efficiency dimension, critics charge that it could become a major source of revenue for the government. The government would have an incentive to create phony public goods in order to increase taxes.

Maybe this happens regardless of what kind of tax the government charges.

The Optimal Quantity of a Public Good

One-size-fits-all approach will not satisfy everyone’s demand for public goods

Many people may oppose mandatory taxation.

Government may not know people’s true preferences. (Squeaky wheel syndrome)

Private Provision of Public Goods

Alternatives to using taxes to fund public goods: Development of new means to exclude

nonpayers Private contracting

Local, State, or Federal Gov’t?

Advantages of local and state government: Better communication and response to the

citizens Local choices will reflect the unique preferences

of the residents

Advantages of federal government: Economies of scale in defense spending Positive and negative externalities may be

nationwide

The Economics of Politics

“Pork Barrel Spending” A public expenditure that is larger than the total

benefit it creates, but that is favored by a legislator because his or her constituents benefit from the expenditure by more than their share of the resulting extra taxes

Sources of Inefficiency in the Political Process

Logrolling The practice whereby legislators support one

another’s legislative proposals

Rent-Seeking The socially unproductive efforts of people or

firms to win a prize.

Rent-Seeking

Inefficiency occurs when:The gains from a government program are

concentrated in the hands of a few beneficiaries.

The costs are spread among many.

Rent-Seeking Example

Assume Price support bill will raise sugar prices by

$0.10/lb. Average American consumes 100 pounds of

sugar per year. Demand for sugar is inelastic

Sources of Inefficiency in the Political Process

Why don’t citizens vote out legislators who support such bills?

Rational ignoranceFree ridersEven though this is a hugely inefficient way

to redistribute income (in this case, from sugar consumers to domestic sugar producers), it is exactly what the government does.

Problems peculiar to Government

Bureaucracy and politicking Slow decisions, not always rational outcomes Rent seeking

Lack of Information Don’t know costs or benefits as well as firms or

consumers doRestriction on choice

Any laws to alter market outcomes require some sort of restriction

The Moral to this Story:

Government is an alternative, not the solution. Don’t rule out government intervention

dogmatically But don’t automatically assume it can fix things

Economic theory helps us predict when government intervention will work.