Public choices and public goods Flashcards
What is a private choice?
A decision that has consequences for the person making it.
What is a public choice?
A decision that has consequences for many people and perhaps for an entire society. E.g. decisions by political leaders about price and quantity regulation, taxes, government spending, etc.
Why do governments exist?
- to establish and maintain property rights.
- provide non-market mechanisms for allocating scarce resources.
- implement arrangements that redistribute income and wealth.
Government failure is…
a situation in which government actions lead to inefficiency; this can lead to under/over-provision
Four groups of decision makers are:
- voters
- firms
- politicians
- bureaucrats
What happens in the political marketplace?
Voters express their demand via votes.
Politicians express their supply of policies with proposals which they hope will attract votes.
Bureaucrats try to get the biggest possible budget for their departments - they use these funds to provide public goods and services.
What happens in a political equilibrium?
The choices of voters, firms, politicians, and bureaucrats are compatible and no group can see a way of improving its position through making a different choice.
What is an excludable good?
A good is excludable if only the people who pay for it receive its benefits.
What is a non-excludable good?
A good is non-excludable if everyone benefits from it regardless of whether they pay for it.
What is a rival good?
A good is rival if one person’s use of it decreases the quantity available for someone else.
What is a non-rival good?
A good is non-rival if one person’s use of it does not decrease the quantity available for someone else.
What are private goods?
A private good is both rival and excludable.
E.g. a can of cola, fish on a Scottish fish farm.
What are public goods?
A public good is both non-rival and non-excludable; it can be consumed simultaneously by everyone, and no one can be excluded from enjoying its benefits.
E.g. National Defence.
What is a common resource?
A common resource is rival and non-excludable; it can be used only once, but no one can be prevented from using what is available.
E.g. North Sea fish.
What are natural monopoly goods?
A natural monopoly good is non-rival and excludable. A special case of natural monopoly occurs when the good/service can be produced at zero marginal cost.
E.g. the internet and cable TV.
What is a mixed good?
Mixed goods don’t fit easily into the four-fold classification. A mixed good is a private good, the production or consumption of which creates an externality.
What is an externality?
An external cost or benefit that arises from the production or consumption of a private good, that falls on someone other than its producer or consumer.
Mixed goods with external benefits
These goods include healthcare and education.
Mixed goods with external costs
These goods include: electricity, and road, rail, and air transportation produced by burning fossil fuels.
Public choices must be made to…
Provide public goods and mixed goods; conserve common resources; regulate natural monopoly.
The free-rider problem
A free-rider enjoys the benefits of a good/service without paying for it; because no one can be excluded from the benefits of a public good, everyone has an incentive to free ride.
What is the value of a private good?
The maximum amount that a person is willing to pay for one more unit of it.
What is the value of a public good?
The maximum amount that all people are willing to pay for one more unit of it.
Marginal social benefit from a public good…
The marginal social benefit from a public good diminishes with the level of the good provided,
