Chapter 19 - Government Flashcards
Define a pure public good
Has 2 properties:
1) Non-diminishability: any one person’s consumption of a public good has no effect on the amount of it available to others
2) Non excludability = either impossible or prohibitively costly to exclude people from consuming the good
not all goods provided by government are public goods… e.g. healthcare not non-diminishable as every min doctor is with one patient, takes away from another
Collective good (definition)
Goods that only have the non-diminishability property
willingness to pay curve calculation (WTP)
Each person must consume the same amount:
- aggregate WTP curve calculated by adding WTP through vertical summation
Lindahl Equilibrium
proposes that individuals should pay for the provision of a public good according to their individual marginal benefit
- but should consume same amount
- only determined if we know all WTP for all consumers
Free Riding (Definition)
Choosing not to contribute to the cost of the public good but exploiting the benefits (non-excludable)
- free riding results in under provision of public goods
Economics of Clubs
MC = 0
- when MC is around the same as AC of expanding consumer’s share purchase and use of good
Shared ownership: \+ decreases costs \+ not kept in continuous use - initiative for arrangment - limits privacy and flexibility
consumers can save $ by forming clubs
- demand for privacy increases with income, but even extremely costly goods can have shared ownership (e.g. private jets)
Majority Voting
order of preferences impacts the transitive/intransitive preference
Majority Rule voting schemes: Requires over 1/2 of voters to approve a collective action w/ N workers
need N/2 + 1 votes to win
Median Voter
Voter whose ideal s=outcome lies above the ideal outcomes of half the voters
Single Peakedness
preferences that exhibit a single most-preferred outcome.
- As we move away from a voter’s most preferred option utility falls
Cost benefit analysis
MV can sometimes obscure important differences in the intensity with which different voters hold their preferences
- CB attempts to take explicit account of how strongly people feel about each of the alternatives (Represented through monetary value)
MV or CB?
- CB benefits people who are willing to pay therefore the poor may feel strongly but doesn’t translate to WTP
- poor can be compensated through CB (also through tax redistribution)
- with MV, poor can block projects (even if B >C)
- with CB, small numbers like flipping a coin
Rent Seeking (explain)
Definition = prospective beneficiaries of a public programme have powerful incentives to lobby government in favour of it
1) projects approved even when B < C
2) When B > C largely, private parties willing to spend £££ to be chosen as its beneficiaries (As there are large gains)
Spend up to the chance of becoming beneficiary * total profit = for lobbying
Theory of competitive factor market
MP system
Each factor will be paid the value of its MP
in the LR payments add up to the total product available for distribution
Marginal Productivity System
Advantages:
- MP scheme clearly identifies a feasible payment for every party is no small advantage
- rewards initiative, effort and risk taking
- harder and longer and more effectively a person works the more she will be paid
Rawslian Criticisms:
- those who do well in the marketplace end up with more while those who fail cannot even meet their basic needs
- assumes all units of a factor = homogenous
- abundant talent not vital, right talent!
suggests veil of ignorance:
- no one knows which rules of distribution would work
- most would choose equal share as they are risk averse and this eliminates risk of doing poorly
- w/o rewards national income < w/ rewards
Negative Income Tax (Milton Freidman)
Array of current programmes will be replaced with one programme
- Minimal adequate SOL and someone w/ no income would receive cash
adv/dis:
- eliminates costly overlapping bureaucracies of current programmes
- if min pay large enough to live on then inevitably will induce many people to stop working
- limit max NIT payment to payment well bellow annual earnings equivalent of full time employment at min wage (desire to find a better job)
Public Jobs
- for disadvantaged
- “employer of last resort”
- unskilled find gov jobs > attractive than private sector
- digging up holes to fill them?
