Chapter 5 Public Goods, Public Choice, and Government Failure Summary

Question 1

What are demand-side market failures?

Answer 1

These occur when demand curves underreport consumers’ willingness to pay, leading to an equilibrium output below the social optimum.

Question 2

What are the two main characteristics of private goods?

Answer 2

Rivalry and excludability.

Question 3

Define ‘rivalry’ in terms of private goods.

Answer 3

Rivalry means one person’s consumption of a product reduces its availability for others.

Question 4

Define ‘excludability’ in terms of private goods.

Answer 4

Excludability means sellers can prevent people who do not pay for a product from obtaining its benefits.

Question 5

Why can private firms typically produce private goods?

Answer 5

Because of excludability, they can charge for these goods, covering production costs and earning a profit.

Question 6

How does government provide public goods?What defines a public good?

Answer 6

Public goods are characterized by nonrivalry and nonexcludability.

Question 7

Define ‘nonrivalry’ in terms of public goods.

Answer 7

Nonrivalry means one person’s consumption of a good doesn’t reduce its availability for others.

Question 8

Define ‘nonexcludability’ in terms of public goods.

Answer 8

Nonexcludability means it is impossible to exclude nonpayers from enjoying the good once it is provided.

Question 9

What is the free-rider problem?

Answer 9

When nonpayers benefit from a public good without paying, reducing the incentive for firms to produce the good.

Question 10

Why don’t private firms usually produce public goods?

Answer 10

Free-riding reduces demand, making it unprofitable as firms cannot effectively charge consumers.

There also isn’t really an incentive to do so

Question 11

How does society typically ensure the provision of public goods?

Answer 11

Through nonmarket provision by the government or private philanthropy, as they do not rely on profitability.

Question 12

How can governments fund public goods despite free riders?

Answer 12

By using taxation to cover the costs, as they are not dependent on profitability.

Question 13

How does the government determine the optimal amount of a public good?

Answer 13

By estimating demand through surveys or votes, and providing the quantity where marginal benefit (MB) equals marginal cost (MC).

Question 14

What does the MB = MC rule represent in public goods?

Answer 14

It indicates the efficient allocation of resources for public goods, where the marginal benefit equals the marginal cost.

Question 15

How does the demand curve for a public good differ from that of a private good?

Answer 15

For public goods, we sum individuals’ willingness to pay at each quantity, rather than summing quantities demanded at each price.

Question 16

What role does cost-benefit analysis play in public goods?

Answer 16

It helps decide whether to provide a public good and in what quantity by comparing social benefits and opportunity costs.

Question 17

Why are highways considered public goods?

Answer 17

Federal highways are nonexclusive and nonrival unless crowded, making them effectively public goods.

Question 18

What is Public Choice Theory?

Answer 18

Public Choice Theory is the economic analysis of government decision-making, politics, and elections, examining how democratic processes impact resource allocation.

Question 19

Why can government intervention in market failures be problematic?

Answer 19

While it aims to address issues like public goods and externalities, government intervention can lead to inefficiencies, sometimes resulting in greater issues than the market failures themselves.

Question 20

What is government failure?

Answer 20

Government failure refers to economically inefficient outcomes caused by shortcomings in the public sector, even when government officials know what citizens want.

Question 21

What is the principal-agent problem in government?

Answer 21

The principal-agent problem occurs when politicians (agents) may act in ways that serve their own interests (e.g., reelection) rather than the best interests of their constituents (principals), leading to economic inefficiency.

Question 22

How does the special-interest effect contribute to government failure?

Answer 22

The special-interest effect occurs when a small group with a particular goal gains a government policy that benefits them, even though it contradicts the majority’s interests, because the group is more vocal and organized.

Question 23

What is the difference between concentrated benefits and diffuse costs?

Answer 23

Concentrated benefits refer to the small group receiving large advantages, while diffuse costs are spread across a large population. This imbalance makes it easier for small groups to influence policy.

Question 24

What is pork-barrel politics?

Answer 24

Pork-barrel politics refers to government projects that benefit a specific political district, where the costs are spread across a larger population but the benefits are concentrated on local constituents.

Question 25

What is rent-seeking behavior?

Answer 25

Rent-seeking behavior is when individuals or groups seek to gain higher profits or benefits from the government through influence or lobbying, rather than through productive activities.

Question 26

How does bureaucracy contribute to inefficiency in government?

Answer 26

Bureaucracy can lead to inefficiency because public agencies lack the profit motive that drives efficiency in private firms, and bureaucrats may work to preserve their own positions and expand government programs.

Question 27

What is regulatory capture?

Answer 27

Regulatory capture occurs when a government agency tasked with regulating an industry becomes influenced by the industry it is supposed to regulate, often resulting in policies that favor the industry.

Question 28

What is the potential solution to regulatory capture?

Answer 28

Deregulation can be a solution, removing the regulatory agency altogether, but it only works if the industry becomes competitive and does not lead to monopolies or negative externalities.

Question 29

What is political corruption?

Answer 29

Political corruption involves government officials misusing their powers for personal gain, such as accepting bribes or misdirecting public resources.