Private/Public Goods & Inequality

Question 1

Wealth/Income inequality

Answer 1

Wealth - how accumulated assets are distributed

Income - to what extent is income unequal

Question 2

Equality of outcome vs. equality of opportunity

Answer 2

Equality of outcome - describes a state in which people have approximately the same material of wealth and income or in which general economic conditions of their lives are alike

Equality of opportunity - describes a state in which individuals are treated similarly unhampered by artificial or arbitrary barriers, except when particular distinctions can be explicitly justified

Equality of opportunity does not result in equality of outcome

Question 3

Statistically, more inequality results in —> social disfunction (8)

Answer 3

1) less trust
2) more crime, prison
3) more mental illness
4) more superiority and inferiority
5) more status insecurity, competition and consumerism
6) more worry of how we are seen and judged
7) more social evaluation anxiety - threats to self-esteem
8) results in lower life expectancy

Question 4

Gini Coefficient

Answer 4

the number that summarizes a country’s level of income inequality based on how unequal income is distributed across quintiles

Question 5

Lorenz curve

Answer 5

Axes and lines

Question 6

Marx: Judgement of capitalism

Answer 6

capitalist production has the tendency to concentrate all capital into fewer and fewer hands​

rising inequality, the immiseration of workers and capital concentration will strengthen the political support for socialism​

Question 7

Kuznet’s curve:

Answer 7

as an economy develops, market forces first increase and then decrease economic inequality​

early development: investment opportunities for those who have money multiply, while an influx of cheap rural labor to the cities holds down wages​

when a certain level of average income is reached and the processes of industrialization – democratization and the rise of the welfare state – inequality decreases​

Question 8

r>g

Answer 8

r stands for the average annual rate of return on capital (profits, dividends, interest, rents, other income from capital) expressed as a percentage of its total value,

g stands for the rate of growth of the economy, i.e. the annual increase in income or output.​

The main argument in Capital for why wealth inequality is set to rise comes from a simple relation: r > g. This formula states that the net rate of return to capital (r) exceeds the growth rate of output

Question 9

Welfare state regimes:

Answer 9

targeted; basic security; encompassing

Question 10

The Paradox of Redistribution

Answer 10

Welfare states in which a greater proportion of spending goes to universal programs tend to be more redistributive than welfare states in which a greater proportion of spending goes to targeted programs.​

Question 11

free-riders

Answer 11

people who benefit without paying

Question 12

public good

Answer 12

anything having the characteristics of non-exclusion (cannot exclude people who do not pay) and non-rivalry (one’s consumption does not ruin the good for others ) e.g. public sewer systems, National defence. Scientific research. More knowledge benefits everyone.

Question 13

Tragedy of the commons

Answer 13

common goods that everyone has access to are often misused and exploited

Question 14

externalities

Answer 14

a situation when there is an external cost or benefit that affects other people of the whole society. positive - education and negative - smoking

Question 15

marginal social cost/benefit of pollution

Answer 15

The marginal social cost of pollution is the additional cost imposed on society as a whole by an additional unit of pollution.

The marginal social benefit of pollution is the additional gain to society as a whole from an additional unit of pollution.

But in a market economy without government intervention, those who benefit from pollution—like the owners of power companies—decide how much pollution occurs. They have no incentive to take into account the costs of pollution that they impose on others.

The costs of pollution, though, fall on people who have no say in the decision about how much pollution takes place: for example, people who fish in northeastern lakes do not control the decisions of power plants.

Question 16

Coase theorem

Answer 16

even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs—the costs to individuals of making a deal—are sufficiently low. Basically that the solutions are hidden in private deals.

(1) The costs of communication among the interested parties. Such costs may be very high if many people are involved.
(2) The costs of making legally binding agreements. Such costs may be high if expensive legal services are required.
(3) Costly delays involved in bargaining. Even if there is a potentially beneficial deal, both sides may hold out in an effort to extract more favorable terms, leading to increased effort and forgone benefit.

In some cases, people do find ways to reduce transaction costs, allowing them to internalize externalities.

Question 17

Pigouvian taxes vs Pigouvian subsidy

Answer 17

Taxes designed to reduce external costs. The optimal Pigouvian tax is equal to the marginal social cost of pollution at the socially optimal quantity of pollution.

A Pigouvian subsidy is a payment designed to encourage activities that yield external benefits

Question 18

excludable good

Answer 18

A good is excludable if the supplier of that good can prevent people who do not pay from consuming it.

Question 19

A good is rival in consumption

Answer 19

if the same unit of the good cannot be consumed by more than one person at the same time.

Question 20

private good

Answer 20

A good that is both excludable and rival in consumption

Question 21

non-excludable good

Answer 21

the supplier cannot prevent consumption by people who do not pay for it. Fire protection is one example: a fire department that puts out fires before they spread protects the whole city, not just people who have made contributions to the Firemen’s Benevolent Association.

Question 22

4 types of goods table:

Answer 22

Private goods, which are excludable and rival in consumption, like wheat.
Public goods, which are nonexcludable and nonrival in consumption, like a public sewer system.
Common resources, which are nonexcludable but rival in consumption, like clean water in a river.
Artificially scarce goods, which are excludable but nonrival in consumption, like on-demand movies on DirecTV.

Question 23

A good is nonrival in consumption

Answer 23

if more than one person can consume the same unit of the good at the same time.

Question 24

Government interference - how to know what to do?

Answer 24

Using this information plus information on the cost of providing the good, the government can use marginal analysis to find the efficient level of providing the public good: the level at which the marginal social benefit of the public good is equal to the marginal cost of producing it.

In the special case of a public good, the marginal social benefit of a unit of the good is equal to the sum of the individual marginal benefits that are enjoyed by all consumers of that unit.

Cost- benefit analysis is the estimation and comparison of the social costs and social benefits of providing a public good. Although governments should rely on cost - benefit analysis to determine how much of a public good to supply, doing so is problematic because individuals tend to overstate the good’s value to them.

It’s straightforward to estimate the cost of supplying a public good. Estimating the benefit is harder.

Question 25

Common Resource

Answer 25

Common resources are goods that are nonexcludable but rival. Nonexcludable means that nobody can be excluded from its use. Rival means that with additional usage, there is less for everyone else.​

Question 26

Two types of government policies:

Answer 26

Regulatory policies - rules established by government decree. Production quota, education funds, etc

Market-based policies - designed to manipulate markets, prices and incentives - taxes and subsidies. ADVANTAGE - instead of spending money on enforcing regulations, the government earns tax revenue to further use

Question 27

The solution to the tragedy: 3 big (3,5,4), (8)

Answer 27

1) Command and control:
often inefficient and ineffective​
local knowledge problem, perverse incentives​

2)Creating Property Rights​:
creating tradable allowances​
e.g. quotas that can be bought and sold​
every individual has incentives to preserve the value of the allowance​
sometimes difficult, not all goods stick to national borders​
relies on government action​

3)Social Norms and Self-Governance:
it is possible to avoid the tragedy, but it is not easy​
local communities can develop shared norms​
overuse results in social disapproval​
takes time, design is context-dependent​

8 Design Principles​
clearly defined boundaries​
adapt locally​
participatory decision-making​
effective monitoring​
graduated sanctions​
easily available conflict resolution​
rights to self-organize​
embeddedness in larger networks

Question 28

Why the Market Cannot Provide Public Goods Efficiently​? (6)

Answer 28

1)Nonexcludability​

it’s is difficult to charge nonpayers → free-riding​

nobody is willing to pay more → no producer is willing to supply​

inefficiently low production

2)Nonrivalry​

marginal cost is zero​

it is inefficient to exclude anyone because that would lead to​ inefficiently low consumption​

Question 29

Public Good Provision in Practice: It’s Difficult​ (4)

Answer 29

1) marginal social benefit is difficult to measure​
2) governments conduct cost-benefit analyses​
3) free riders vs forced riders (people who do not benefit, but are forced to pay via taxes)​
4) there is no invisible hand theorem for democratic decision-making​