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,
The economy’s MSB from a public good is…
the sum of the marginal benefits of all individuals at each quantity of the good provided. The economy’s MSB curve for a public good is the vertical sum of all individual MB curves.
The market demand curve for a private good is…
the horizontal sum of the individual demand curves at each price. This contrasts with the MSB curve for a public good.
The efficient quantity of a public good is the quantity at which…
MSB=MSC
What is the principle of minimum differentiation?
The tendency for competitors to make themselves similar so as to appeal to the maximum number of voters/clients.
E.g. politicians wanting to appeal to a majority of voters end up sharing similar policies; the same principle applies to competing firms such as McDonald’s and Burger King.
What is the objective of bureaucrats?
They want to maximise their department’s budget, as this will increase their status and power. They may try to persuade politicians to provide more than the efficient quantity.
What is rational ignorance?
The decision by a voter not to acquire information about a policy or provision of a public good because the cost of doing so exceeds the expected benefit.
If rationally ignorant voters enable bureaucrats to achieve their goal of maximising their budget…
the public good might be overprovided and a deadweight loss created.
Marginal private benefit
The private benefit from consuming one more unit of a good/service.
Marginal external benefit
The benefit from consuming one more unit of a good/service that people other than the consumer enjoy.
Marginal social benefit
The marginal benefit enjoyed by the entire society.
MSB = MB + marginal external benefit
Marginal external benefit is shown on a graph as…
the vertical distance between the MB and the MSB curves.
What are the 3 devices that government can use to achieve a more efficient allocation of resources?
- public production
- private subsidies
- vouchers
(definitions on separate cards)
Public production
Under public production, a public authority that receives payment from the government produces a good/service.
E.g. healthcare and education in the UK.
Private subsidies
A subsidy is a payment by the government to private producers. If the government pays the producer an amount equal to the marginal external benefit, then the quantity produced will be efficient.
E.g. transport in the UK
Vouchers
A voucher is a token that the government provides to households, which they can use to buy specified goods/services.
E.g. used in parts of the US for education.