The document discusses different categories of goods such as private goods, public goods, and goods that fall in between. It also covers topics like the optimal provision of public goods, the free rider problem, and how governments pay for public goods through taxation. Special interest groups and rent seeking behavior are explained as well as different types of legislation based on how costs and benefits are distributed.
2. Private Goods, Public Goods, and In
Between
• Private Goods: Rival and exclusive
– Pizza
– Sodas
– Shoes
• Public Goods: Non-rival and non-exclusive
– Public Defense
– Parks
3. Private Goods, Public Goods, and In
Between
• For-profit firms can’t profitably sell public
goods.
– Thus, the government comes to the rescue by
providing public goods and paying for them
through enforced taxation.
– Sometimes non-profit firms provide these goods.
4. Private Goods, Public Goods, and In
Between
• In Between: non-rival but exclusive
– Cable
– Internet
• These are natural monopolies
• Rival but nonexclusive
– Hunting
– Fishing
• They are nonexclusive in that it would be costly if not
impossible for a firm to prevent access to these goods
5. Open-access goods
• A good that is rival in consumption but non-
payers cannot be excluded easily.
7. Optimal Provision of Public Goods
• Non-rival in consumption
– Once produced, the good is available in that amount
to all consumers.
• Market Demand Curve
– The vertical sum of each consumer’s demand for the
public good.
• Efficient level of the public good
– Market demand curve intersects the marginal cost
curve
– Where the sum of the marginal valuations equals the
marginal cost
8. 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.
9. Paying for Public Goods
• The efficient approach would be to impose a
tax on each resident equal to his or her
marginal valuation.
• Problem with this:
– Once people realize their taxes are based on
government estimates of how much they value
the good, they will understate their true
valuation.
• Thus, they create a free-rider problem.
– The ability to pay the tax
10. Free-Rider Problem
• Because a person cannot be easily excluded
from consuming a public good, some people
may try to reap the benefits of the good
without paying for it.
– Going to a park outside of your town.
11. Median-Voter Model
• The median-voter is the one whose
preferences lie in the middle of all voters’
preferences.
– It predicts that under certain conditions, the
preference of the median, or middle, voter will
dominate other choices.
12. Special Interest
• Rational self-interest assumption of economic
behavior
– Elected officials try to maximize their political
support
– How?
• Cater to special interests rather than serve the interest
of the public
13. Rational Ignorance
• Why don’t consumers stop this behavior?
– They consume so many different products that
they have neither the time nor the incentive to
understand the effects of public choices on every
product.
– Tiny possibility of influencing public choices
– So, what do they do?
• Rational ignorance: they remain largely oblivious to
most public choices.
• MC>MB for each public choice
14. Rational Ignorance
• Because information and the time required to
acquire and digest it are scarce, consumers
concentrate on private choices rather than
public choices.
• The payoff is more immediate, more direct,
and more substantial.
15. Distribution of Benefits and Costs
• Four possible categories of distribution:
– Widespread benefits and widespread costs
– Concentrated benefits and widespread costs
– Widespread benefits and concentrated costs
– Concentrated costs and concentrated benefits
16. Traditional public-goods legislation
• This legislation involves widespread costs and
widespread benefits-nearly everyone pays
and nearly everyone benefits.
– National defense
17. Special-interest legislation
• Benefits are concentrated but costs
widespread
– These usually harm the economy on net, because
total costs often exceed total benefits
– Pork-barrel spending: special-interest legislation
with narrow geographical benefits but funded by
all taxpayers.
18. Populist legislation
• Legislation with widespread benefits but
concentrated costs.
– Because the small group that bears the cost is savvy
about the impact of the proposed legislation but
those who would reap the benefits remain rationally
ignorant, populist legislation has little chance of
approval.
– The only way such measures get approved is if some
political entrepreneur raises enough visibility about
the issue to gather public attention and votes.
19. Competing-interest legislation
• Legislation that confers concentrated benefits
on one group by imposing concentrated costs
on another group.
– Labor unions vs. employers
– Steel makers vs. GM
20. LO2 Exhibit 3
Categories of Legislation Based on the
Distribution of Costs and Benefits
21. Rent Seeking
• Special-interest groups seek some special
advantage or some outright transfer or
subsidy from the government
– Rents: An amount that exceeds what the producer
would require to supply the product.
– Rent Seeking: the activity that interest groups
undertake to secure these special favors from
government
22. Rent Seeking
• These special interest groups shift resources
from productive endeavors that create output
and income to activities that focus more on
transferring income to their special interests.
23. LO2 Farm Subsidies
The Agricultural Marketing Agreement
Act, 1937
Case Study
Prevent ‘ruinous competition’
One in four Americans: farm
Floor prices
2007
One in fifty Americans: farm
$18 billions a year
24. LO2 Farm Subsidies
To subsidize farmers, consumers
pay
Case Study
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
25. LO2 Exhibit 4
Effects of Milk Price Supports
No government intervention:
market price = $1.50 per gallon,
Excess quantity supplied S and 100 million gallons are sold
per month.
Dollars per gallon
$2.50 Government: floor price = $2.50
per gallon, quantity supplied
1.50 increases and the quantity
demanded decreases.
D To maintain the higher price, the
government must buy the excess
quantity at $2.50 per gallon.
Millions of
0 75 100 150
gallons per
month
26. Example of Farm Subsidies-”Stossel
Example of Farm Subsidies-”Stossel
in the Classroom”
in the Classroom”
27. The Underground Economy
• Does a tax discourage production?
– When a government taxes more, less production
takes place.
– Underground Economy: an expression used to
describe market activity that goes unreported
either because it is illegal or because those
involved want to evade taxes.
• Tips
28. What are the effects of taxing
productive activities?
• Two Effects:
– Resource owners may supply less of the taxed
resource because the after-tax wage declines.
– To evade taxes, some people shift from the
formal, reported economy to an underground,
“off the books” economy.
29. When do underground economies
grow?
• Government regulations increase
• Tax rates increase
• Government corruption is more widespread
30. Ownership and Funding of Bureaus
• Bureaus: government agencies charged with
implementing legislation and financed by
appropriations from legislative bodies
– They do not have to meet a market test
– Different incentives than for-profit firms
31. Ownership and Organizational
Behavior
• Because public goods and services are not
sold in markets, government bureaus receive
less consumer feedback and have less
incentive to act on any feedback they do
receive.
• Because the ownership of bureaus is not
transferable, there is less incentive to
eliminate waste and inefficiency.
32. Bureaucratic Objectives
• The traditional view is that bureaucrats are
“public servants,’ who try to serve the public
as best they can.
– Is this realistic?
