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UMass Amherst ECON 103 - Class 7 Public goods Fall 2014

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Slide 1Slide 2Slide 3Slide 4Big points!Slide 6Slide 7Buffy saved the world. And all she got was a tombstone.Slide 9Saving the world doesn’t pay unless you can exclude someoneSafety from demons and vampires is nonexclusive.Gramercy Park, New YorkGramercy Park is on the East Side of NYCSlide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Take-Away PointsSoxHow to kill the vampires?Public goods and Buffy’s problem.Problems with markets:Public goods, externalities, Prisoner's Dilemmas, and BuffyThe best TV everBig points!•Private goods can exclude access; public goods are open to all•Market encourages production of private goods, not of public goods •Tragedy of the Commons and free riding•Example of prisoner’s dilemma•Social regulations and morality needed to overcome collective action problemsDoes the opportunity to get rich encourage people to create wealth?That would be niceOr does it lead them to neglect the public good?What about Buffy?Why couldn’t she make a livingShe does important work – saving the world. A lot.She risks her life killing bad guys. Season 1’s Master was really grossBuffy saved the world.And all she got was a tombstone.Did you know that McDonalds sued Buffy (Sarah Michelle Gellar)?Where was the beef?Saving the world doesn’t pay unless you can exclude someoneBuffy’s problem: she produces a nonexclusive good.No one will pay for what they can get without paying.No one will pay for public goods. They would rather free ride.Some “demons” are hot.Safety from demons and vampires is nonexclusive.Everyone is protected when Buffy kills the bad guys.Everyone benefits from clean air, good sidewalks, the Amherst Common.You get these without paying.So no one has a personal reason to take care of it. Everyone waits for someone else.What if we put a fence around the Commons and charged admission?Gramercy Park, New YorkBy putting a fence and locked gate around the park, residents have created a private good. People can profit from Gramercy Park because they have privatized it, made it an exclusive good.Gramercy Park is on the East Side of NYCBasic problem with relying on market: No one cares about Externalities Market activity is totally self-absorbed. We don’t care what happens to others.Wendy’s beef cows cause global warming, sinking TuvaluGoodbye VeniceSaving Venice is a “Public Good”We all benefit, regardless of whether we contribute.Non-exclusivityBuffy produces a “public good” when she saves the world from vampires and demonsOur flowers are a public goodI cannot stop you from looking at them (nonexcludibility).Your viewing doesn’t impinge on others. The view is “nondepletable”. Real views from my bedroom window.Slaying vampires is a public goodWe all benefit; nonexcludibility. Your safety does not reduce the safety available for others; nondepletibility.Why would anyone pay for a public good?You get it even if you don’t contribute! (Nonexclusivity!)Selfish (rational) will let someone else do it.Leave it to Buffy (and her friends)So why would Buffy save the world?She can’t charge for a public good!Fortunately, her Mom taught her good “norms”OK: She can try to charge. But who would pay since you could get the world-saving even if you don’t pay. So long as someone else pays. Or Buffy does it anyway.Good norms help because many important things are not done through marketsAnd markets often don’t work well.Could we use the market to get Buffy to kill VampiresProblems:Free riding: Who will contribute money to a public good? Why pay when you can get it for free?Transactions costs: How to reward Buffy?Pay her for each Vampire? (Then she’ll only kill them in groups?)Follow her around counting kills?She is a monopolist, the only slayer: What if she demands a raise?Maybe we should just draft Buffy?Could we make her kill the Vamps?We still have to enforce our rules on her!If Buffy wanted to get rich:She would rob banks instead of killing vampires.She’d be good at it.Paying for public goods is a prisoner’s dilemma problemSocrates observed this at the battle of Delium:“If we win, my contribution will not be essential but I risk death or injury. If the Boetians win, then my chances of death or injury are higher and my contribution immaterial.” A selfish Socrates would save himself and flee. If all did this, it would be a disastrous stampede.Basic Prisoner’s DilemmaArrest two criminals, put them in separate cells, and threaten them both with damnation if they don’t talk.Prisoner 1 \\ Prisoner 2 Stick to story RatStick to story Parole, Parole Long jail, walk Rat Walk, Long jail Jail, jailMuch of life is prisoner’s dilemmaWe all want someone else to take care of public goods and externalities.But when we all wait for someone else, nothing gets done.Too many free riders. Too few vampire slayers.The Public Goods DilemmaWould any group of rational and selfish people provide for public goods? Ride bus or drive:Person 1 \\ Person 2 Ride bus Not botherRide bus Inconvenient but cleaner air; inconvenient but cleaner air.Inconvenient and dirty air, and feel used; convenient and dirty air.Not bother Convenient and dirty air; inconvenient, dirty air, and feel used.Inconvenient and very dirty air; Inconvenient and very dirty air.If no one pays, then we don’t get public goodsAll “free riders,” no Buffy, no public goods.This is the “prisoner’s dilemma” outcome: individual maximization leads to a collective disaster.The “Tragedy of the Commons” where everyone looks after their own interest, over grazes, until the commons is used up.Take-Away Points•Markets do not encourage people to produce public goods.•Social norms can encourage public goods but they are undermined by market incentives.•Coase: if property rights are clearly specified then efficient outcome without government.•Coase doesn’t lead to efficiency because of collective action problems, bargaining, and a maldistribution of


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