ECON 201 1st Edition Lecture 15 I Political Economy A Public Goods Gods are non rivalrous non rival if consumption by one agent does not limit consumption by others Goods are non excludable if consumption by one agent does not block the option to consume for others A public good is a good service that is both non rival and non excludable EX Internet once one person buys it it becomes open to the public o How do you share the price with your roommates o Cut the price evenly o Password protected Free Rider Problem o Once a public good is provided there is no limit to the number of consumers who can enjoy it o This gives an incentive for people not to pay for public goods and consume later B Social Choice We have seen with monopolies and public goods that there may be a role for government to intervene in the market place o This is in the case of pricing power and externalities we may wish to abandon laisez faire markets let it work on its own o In the market price directs resources based on consumers and producers private evaluations o With public goods there is a role for provision C Difficulty in determining Social Preferences Type 1 Condorcet voting paradox a Often governments face several choices about how to intervene in the market place and must decide among them b Ex Voters 1 2 3 Order of Preferences A B C B C A C A B 35 45 20 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 o o Consider a pair wise vote on these government policies First Consider B or C Type1 choose B Type 2 choose B Type 3 choose C 80 vote B o Second Consider A or B Type 1 choose A Type 2 choose B Type 3 Choose A 55 vote A A wins o What happens if we reverse the order o First Consider A or C Type 1 choose A Type 2 choose C Type 3 chose C 65 choose C A fails o Condorcet s Voting Paradox states that there is NO pair wise voting system that consistently reveals the same social preferences among different voters 2 Arrow s Impossibility Theorem a Think about what a good voting system would look like b Transitivity i If A is preferred to B and B to C and A to C then A is preferred to C ii Irrelevance of outside options iii Unanimity if everyone likes A B then A wins iv No dictators rule c Rational Ignorance unknown preferences d There is no voting system that guarantees all these criteria are met
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