19 Social Planning and Government

Question 1

What would a social planner do in terms of public good externalities?

Answer 1

Internalise the externality by merging the people and choose the quantities of the private goods and the overall level of public goods, according to social preferences:

Question 2

How do we choose a combination of public goods to optimise social welfare?

Answer 2

Question 3

Samuelson and Cournot-Nash conditions

Answer 3

Question 4

Public goods in the private sector

Answer 4

Public goods will be under-provided by the private sector, leading to a deadweight loss.

Question 5

Why is is difficult to find an efficient level of provision for public goods?

Answer 5

The difficultly to find an efficient level of provision as there is generally no incentive to honestly report their WTP.

If you charge WTP, they’ll under-report.

Question 6

Hospitals as private goods

Answer 6

A hospital is not non-rival - beds and appointments can only be occupied by one.

A hospital is not non-excludable.

Good healthcare therefore is a mainly private good, which can be publicly providing.

Question 7

So when should le governement provide instead? (4)

Answer 7

Not just for public goods but also:

• The case of public provision is usually strongest where market failures are severe.
• e.g. infrastructure: short-termism, externalities and natural monopoly all mean there is a tendency to under-invest and raise prices/restrict output.
• Healthcare and education are not well described by a competitive model of equally well-informed buyers and sellers. Informational asymmetry and the benefits are often unknown in advance.
• This makes financing through a private market in insurance or student loans difficult to sustain, making a role for government inevitable.

Question 8

Difference between publicly funded and publicly provided services

Answer 8

It is perfectly possible for the government to buy provision from the private sector (outsourcing).

Whether provision is public or private depends on where the best value for money can be found.

Question 9

Standard economic roles for government from a markets-based perspective (3)

Answer 9

1. to redistribute resources
2. to correct market failures
3. the mitigation of risk

^ Chicagoan view of Government

Question 10

How is the government a risk manager?

Answer 10

• Insurance against loss of employment, income, health: these functions are also risk-management
• Govt. responsible for establishing and enforcing legal and institutional frameworks that enable markets to function as expected

Question 11

What are some arguments against using markets for everything? (4)

Answer 11

• Repugnant markets: creating a market for goods or services that would violate social or ethical norms
• Other institutions may be more effective e.g. government or families
• Market mechanisms may crowd out norms of social preferences
• Merit goods: goods that should be available to everyone, independent of means to pay e.g. education, health?, housing???