Public choices and public goods

Question 1

What is a private choice?

Answer 1

A decision that has consequences for the person making it.

Question 2

What is a public choice?

Answer 2

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.

Question 3

Why do governments exist?

Answer 3

1. to establish and maintain property rights.
2. provide non-market mechanisms for allocating scarce resources.
3. implement arrangements that redistribute income and wealth.

Question 4

Government failure is…

Answer 4

a situation in which government actions lead to inefficiency; this can lead to under/over-provision

Question 5

Four groups of decision makers are:

Answer 5

1. voters
2. firms
3. politicians
4. bureaucrats

Question 6

What happens in the political marketplace?

Answer 6

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.

Question 7

What happens in a political equilibrium?

Answer 7

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.

Question 8

What is an excludable good?

Answer 8

A good is excludable if only the people who pay for it receive its benefits.

Question 9

What is a non-excludable good?

Answer 9

A good is non-excludable if everyone benefits from it regardless of whether they pay for it.

Question 10

What is a rival good?

Answer 10

A good is rival if one person’s use of it decreases the quantity available for someone else.

Question 11

What is a non-rival good?

Answer 11

A good is non-rival if one person’s use of it does not decrease the quantity available for someone else.

Question 12

What are private goods?

Answer 12

A private good is both rival and excludable.

E.g. a can of cola, fish on a Scottish fish farm.

Question 13

What are public goods?

Answer 13

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.

Question 14

What is a common resource?

Answer 14

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.

Question 15

What are natural monopoly goods?

Answer 15

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.

Question 16

What is a mixed good?

Answer 16

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.

Question 17

What is an externality?

Answer 17

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.

Question 18

Mixed goods with external benefits

Answer 18

These goods include healthcare and education.

Question 19

Mixed goods with external costs

Answer 19

These goods include: electricity, and road, rail, and air transportation produced by burning fossil fuels.

Question 20

Public choices must be made to…

Answer 20

Provide public goods and mixed goods; conserve common resources; regulate natural monopoly.

Question 21

The free-rider problem

Answer 21

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.

Question 22

What is the value of a private good?

Answer 22

The maximum amount that a person is willing to pay for one more unit of it.

Question 23

What is the value of a public good?

Answer 23

The maximum amount that all people are willing to pay for one more unit of it.

Question 24

Marginal social benefit from a public good…

Answer 24

The marginal social benefit from a public good diminishes with the level of the good provided,

Question 25

The economy’s MSB from a public good is…

Answer 25

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.

Question 26

The market demand curve for a private good is…

Answer 26

the horizontal sum of the individual demand curves at each price. This contrasts with the MSB curve for a public good.

Question 27

The efficient quantity of a public good is the quantity at which…

Answer 27

MSB=MSC

Question 28

What is the principle of minimum differentiation?

Answer 28

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.

Question 29

What is the objective of bureaucrats?

Answer 29

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.

Question 30

What is rational ignorance?

Answer 30

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.

Question 31

If rationally ignorant voters enable bureaucrats to achieve their goal of maximising their budget…

Answer 31

the public good might be overprovided and a deadweight loss created.

Question 32

Marginal private benefit

Answer 32

The private benefit from consuming one more unit of a good/service.

Question 33

Marginal external benefit

Answer 33

The benefit from consuming one more unit of a good/service that people other than the consumer enjoy.

Question 34

Marginal social benefit

Answer 34

The marginal benefit enjoyed by the entire society.

MSB = MB + marginal external benefit

Question 35

Marginal external benefit is shown on a graph as…

Answer 35

the vertical distance between the MB and the MSB curves.

Question 36

What are the 3 devices that government can use to achieve a more efficient allocation of resources?

Answer 36

1. public production
2. private subsidies
3. vouchers
   (definitions on separate cards)

Question 37

Public production

Answer 37

Under public production, a public authority that receives payment from the government produces a good/service.
E.g. healthcare and education in the UK.

Question 38

Private subsidies

Answer 38

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

Question 39

Vouchers

Answer 39

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.