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UB ECO 182 - Chapter 16(1)

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Slide 1After studying this chapter, you will be able to:Slide 3Public ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesPublic ChoicesProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsProviding Public GoodsPositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health CarePositive Externalities: Education and Health Care16PUBLIC CHOICES AND PUBLIC GOODS© 2014 Pearson Addison-WesleyAfter 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-WesleyFighting 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-WesleyPublic ChoicesA 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-WesleyPublic ChoicesWhy Governments ExistGovernments exist for three reasons. They1. Establish and maintain property rights.2. Provide nonmarket mechanisms for allocating scarce resources.3. Implement arrangements that redistribute income and wealth.© 2014 Pearson Addison-WesleyPublic ChoicesReplacing markets with government resource allocation decisions is no simple matter.Government failure is a situation in which government actions lead to inefficiencyGovernment failure can lead to overprovision or under provision.© 2014 Pearson Addison-WesleyPublic ChoicesPublic Choice and Political MarketplaceFour groups of decision makers are:VotersFirmsPoliticiansBureaucrats© 2014 Pearson Addison-WesleyPublic ChoicesPolitical MarketplaceVoters 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-WesleyPublic ChoicesBureaucrats try to get the biggest possible budget for their departments andprovide public goods and services.© 2014 Pearson Addison-WesleyPublic ChoicesPolitical EquilibriumIn a political equilibrium the choices of voters, firms, politicians, and bureaucrats are compatibleand no group can see a way of improving its position by making a different choice.© 2014 Pearson Addison-WesleyPublic ChoicesWhat 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-WesleyPublic Choices ExcludableA 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 RivalA 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. Public Choices© 2014 Pearson Addison-WesleyPublic ChoicesA Four-Fold ClassificationPrivate GoodsA 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-WesleyPublic ChoicesCommon ResourcesA 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-WesleyPublic ChoicesNatural Monopoly GoodsA 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-WesleyPublic ChoicesFigure 16.2 shows this four-fold classification of goods and services.© 2014 Pearson Addison-WesleyPublic ChoicesMixed Goods and


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