ECON 100 1st Edition Lecture 15 Outline of Last 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 Outline of Current Lecture I Positive Externalities A Private Benefits and Social Benefits B Government Actions in the Market for a Mixed Good with External Benefits 1 Public Productions 2 Private subsidies 3 Vouchers II Bureaucratic Inefficiency and Government Failure A Problems with Public Production B Problems with Private Subsidies III Are Vouchers the Solution A Four reasons vouchers are popular with economists Current Lecture Positive Externalities The two goods with the largest external benefits are education and health care Private Benefits and Social Benefits A private benefit is a benefit that the consumer of a good or service receives Marginal private benefit MB is the private benefit from consuming one more unit of a good or service An external benefit is a benefit that someone other than the consumer receives Marginal external benefit is the benefit from consuming one more unit of a good or service that people other than the consumer enjoy 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 Marginal social benefit is the marginal benefit enjoyed by the entire society by the consumer and by everyone else on whom the benefit falls Marginal social benefit is the sum of marginal private benefit and marginal external benefit MSB MB Marginal external benefit Marginal external benefit is shown by the vertical distance between the MB and MSB curves Government Actions in the Market for a Mixed Good with External Benefits Buyers pay the market price Taxpayers must pay the rest of the MSC Three devices that the government can use to achieve a more efficient allocation of resources in the presence of external benefits are 1 Public production Under public production a public authority that receives payment from the government produces the good or service 2 Private subsidies A subsidy is a payment by the government to private producers If the government pays the producer an amount equal to the marginal external benefit the quantity produced is efficient 3 Vouchers A voucher is a token that the government provides to households which they can use to buy specified goods or services Bureaucratic Inefficiency and Government Failure Are pubic provision subsidized private provision and vouchers equivalent No The behavior of bureaucrats combined with rational ignorance leads to government failure 1 Problems with Public Production Public production might lead to underproduction as bureaucrats seek to maximize their budget by budget padding and waste 2 Problems with Private Subsidies The subsidy budget has to be administered by bureaucrats and they might blow out the costs of administration and cut the size of the subsidy Producers receiving the subsidy might allocate some of it to lobbying for a larger subsidy and less to production These actions will lead to an inefficient outcome Are Vouchers the Solution Vouchers have four advantages over public provision and private subsidies 1 Vouchers can be used with public production private provision or competition between the two 2 Governments can set the total value of vouchers to overcome bureaucratic overproduction and budget padding 3 Vouchers spread the public contribution thinly across millions of consumers so no one has an interest in wasting the value of the voucher received in lobbying 4 By giving the buying power to the final consumer producers must compete for business and provide a high standard of service at the lowest attainable cost For these four reasons vouchers are popular with economists but they are controversial and opposed by most bureaucrats