ECON 100 1st Edition Lecture 14 Outline of Last Lecture I The Case Against Protection A Seven Arguments for Trade Restrictions II Trade Wars A Restricted International Trade 1 Tariff Revenue 2 Rent Seeking III Compensating Losers Outline of Current Lecture I Choices A Private Choices B Public Choices II Why Governments Exist III Public Choice and the Political Marketplace IV Types of Goods and Services A Mixed Goods and Externalities B Inefficiencies That Require Public Choice V Free Rider Problem Current Lecture Choices A private choice is a decision that has consequences for only the person making it Decisions to buy and sell in a competitive market A public choice is a decision that has consequences for many people and perhaps for an entire society Decisions by political leaders and senior public servants about price and quantity regulations taxes international trade policy and government spending Governments Governments exist for three major reasons 1 To establish and maintain property rights 2 To provide nonmarket mechanisms for allocating scare resources 3 To implement arrangements that redistribute income and wealth These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Government failure is a situation in which government actions lead to inefficiency to either underprovision or overprovision Government failure can arise because government is made up of many individuals each with their own economic objectives Public Choice and the Political Marketplace Four groups of decision makers interact in the political marketplace 1 Voters evaluate politicians policy proposals benefit from public goods and services and pay some off the taxes Vote help in political campaigns lobby and make campaign contributions 2 Firms evaluate politicians policy proposals benefit from public goods and services and pay some off the taxes Make campaign contributions are a major source of funds for political parties engage in lobbying activity to persuade politicians to propose policies that benefit them 3 Politicians the elected persons in the federal state and local governments 4 Bureaucrats the public servants who work in government departments Administer tax collection the delivery of public goods and services and the administration of rules and regulations Political Equilibrium The balance of forces in the political marketplace determines the outcome of all the public choices that people make In a political equilibrium the choices of voters firms politicians and bureaucrats are all compatible and no group can see a way of improving its position by making a different choice Ideally political equilibrium will achieve allocative efficiency and serve the social interest Public Goods What makes a good a public good we distinguish between two features of all goods 1 The extent to which people can be excluded from consuming the good A good is excludable if it is possible to prevent someone from enjoying its benefits A good is nonexcludable if it is impossible or extremely costly to prevent anyone from benefiting from it 2 The extent to which one person s consumption rivals someone else s consumption A good is rival if one person s use of it decreases the quantity available for someone else A good is nonrival if one person s use of it does not decrease the quantity available for someone else 4 Types of Goods and Services 1 Private good both rival and excludable 2 Public good both nonrival and nonexcludable 3 Common Resource 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 4 Natural Monopoly Goods nonrival and excludable When buyers can be excluded if they don t pay but the good is nonrival marginal cost is zero Mixed Goods and Externalities 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 Mixed goods with external benefits Ex education and health care A flu vaccination is excludable and rival and brings a benefit that is like a public good nonexcludable and nonrival Education is excludable and rival and brings a benefit that is like a public good nonexcludable and nonrival Mixed goods with external costs Ex electricity and transportation produced by burning hydrocarbon fuels Both are excludable and rival but is considered a public bad nonexcludable and nonrival Inefficiencies that Require Public Choices Public choices must be made to 1 Provide public goods and mixed goods Because no one can be excluded from enjoying the benefits of a public good no one has an incentive to pay for their share of it The market economy would underprovide mixed goods with external benefits because their producers and consumers don t take the external benefits into account when they make their own choices The market economy would overprovide mixed goods with external costs because their producers and consumers don t take the external costs into account when they make their own choices 2 Conserve common resources Because no one can be excluded from enjoying the benefits of a common resource no one has an incentive to pay for their share of it or to conserve it for future enjoyment The market economy would overproduce while stocks lasted and then underproduce as stocks ran out the tragedy of the commons requires public choices to limit the overuse and eventual destruction of common resources 3 Regulate natural monopoly When people can be excluded from enjoying the benefits of a good if they don t pay for it and when the good is nonrival the marginal cost of producing it is zero A natural monopoly can produce such a good at the lowest cost Providing Public Goods The Free Rider Problem A free rider enjoys the benefits of a good or service without paying for it Everyone has an incentive to free ride The free rider problem is that the economy would provide an inefficiently small quantity of a public good Marginal social benefit from the public good would exceed its marginal social cost and a deadweight loss would arise The value of a private good is the maximum amount that a person is willing to pay for one more unit of it The value of a