16 PUBLIC CHOICES AND PUBLIC GOODS After studying this chapter you will be able to Explain why some choices are public choices and how they are made in a political marketplace Explain how the free rider problem arises and how the quantity of public goods is determined Explain why goods with external benefits lead to inefficient underproduction and how public choices can achieve allocative efficiency 2014 Pearson Addison Wesley Fighting a Colorado wildfire providing schools and colleges policing neighborhoods and highways operating the courts Governments do all these things But why Why not private firms And do governments do an efficient job or are they too big To illustrate the principles of public choice we ll look at the provision of education and health care 2014 Pearson Addison Wesley Public Choices A public choice is a decision that has consequences for many people and perhaps for an entire society Examples of public choices include Decisions by political leaders and senior public servants about price and quantity regulation taxes international trade and government spending 2014 Pearson Addison Wesley Public Choices Why Governments Exist Governments exist for three reasons They 1 Establish and maintain property rights 2 Provide nonmarket mechanisms for allocating scarce resources 3 Implement arrangements that redistribute income and wealth 2014 Pearson Addison Wesley Public Choices Replacing markets with government resource allocation decisions is no simple matter Government failure is a situation in which government actions lead to inefficiency Government failure can lead to overprovision or under provision 2014 Pearson Addison Wesley Public Choices Public Choice and Political Marketplace Four groups of decision makers are Voters Firms Politicians Bureaucrats 2014 Pearson Addison Wesley Public Choices Political Marketplace Voters express their demand via votes Voters and firms express their demand for policies via campaign contributions Politicians express their supply of policies with proposals which they hope will attract votes 2014 Pearson Addison Wesley Public Choices Bureaucrats try to get the biggest possible budget for their departments and provide public goods and services 2014 Pearson Addison Wesley Public Choices Political Equilibrium 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 by making a different choice 2014 Pearson Addison Wesley Public Choices What Is a Public Good What is the essential difference between A city police department and Brink s security Fish in the Atlantic Ocean and fish in a fish farm A live concert and a concert on television These and all goods and services can be classified according to whether they are excludable or nonexcludable and rival or nonrival 2014 Pearson Addison Wesley Public Choices Excludable A good is excludable if only the people who pay for it are able to enjoy its benefits Brink s security services East Point Seafood s fish and a Coldplay concert are examples A good is nonexcludable if it is impossible or extremely costly to prevent anyone from benefiting from it The services of the LAPD fish in the Pacific Ocean and a concert on network television are examples 2014 Pearson Addison Wesley Public Choices Rival A good is rival if one person s use of it decreases the quantity available for someone else A Brink s truck can t deliver cash to two banks at the same time A fish can be consumed only once A good is nonrival if one person s use of it does not decrease the quantity available for someone else The services of the LAPD and a concert on network television are nonrival 2014 Pearson Addison Wesley Public Choices A Four Fold Classification Private Goods A private good is both rival and excludable A can of Coke and a fish on East Point Seafood s farm are examples of private goods Public goods A public good is both nonrival and nonexcludable A public good can be consumed simultaneously by everyone and no one can be excluded from its benefits National defense is the best example of a public good 2014 Pearson Addison Wesley Public Choices Common Resources A common resource is rival and nonexcludable A unit of a common resource can be used only once but no one can be prevented from using what is available Ocean fish are a common resource They are rival because a fish taken by one person isn t available for anyone else They are nonexcludable because it is difficult to prevent people from catching them 2014 Pearson Addison Wesley Public Choices Natural Monopoly Goods A natural monopoly good is nonrival and excludable A special case of natural monopoly arises when the good or service can be produced at zero marginal cost Such a good is nonrival If it is also excludable it is produced by a natural monopoly The Internet and cable television are examples 2014 Pearson Addison Wesley Public Choices Figure 16 2 shows this four fold classification of goods and services 2014 Pearson Addison Wesley Public Choices Mixed Goods and Externalities Mixed goods don t fit neatly into the four fold classification A mixed good is a private good the production or consumption of which creates an externality An externality is a cost external cost or a benefit external benefit that arises from the production or consumption of a private good and that falls on someone other than its producer or consumer A negative externality imposes a cost a positive externality provides a benefit 2014 Pearson Addison Wesley Public Choices Mixed Goods with External Benefits These goods include health care and education Mixed Goods with External Costs These goods include electricity and road rail and air transportation produced by burning hydrocarbon fuels coal oil and natural gas 2014 Pearson Addison Wesley Public Choices Inefficiencies that Require Public Choices Public choices must be made to Provide public goods and mixed goods Conserve common resources Regulate natural monopoly 2014 Pearson Addison Wesley Providing Public Goods The Free Rider Problem A free rider enjoys the benefits of a good or 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 Public goods create a free rider problem the absence of an incentive for people to pay for what they consume 2014 Pearson Addison Wesley Providing Public Goods The value of a private good is the maximum amount that a person is willing to