ECON 100 1st Edition Lecture 15 Outline of Last Lecture I. ChoicesA. Private ChoicesB. Public Choices II. Why Governments ExistIII. Public Choice and the Political MarketplaceIV. Types of Goods and ServicesA. Mixed Goods and Externalities B. Inefficiencies That Require Public Choice V. Free-Rider ProblemOutline of Current Lecture I. Positive Externalities A. Private Benefits and Social BenefitsB. Government Actions in the Market for a Mixed Good with External Benefits1. Public Productions2. Private subsidies3. VouchersII. Bureaucratic Inefficiency and Government FailureA. Problems with Public ProductionB. Problems with Private SubsidiesIII. Are Vouchers the Solution?A. Four reasons vouchers are popular with economistsCurrent LecturePositive 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 enjoyThese 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 service2. 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 efficient3. 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 failure1. Problems with Public Production Public production might lead to underproduction as bureaucrats seek to maximize their budget by budget padding and waste2. 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 two2. Governments can set the total value of vouchers to overcome bureaucratic overproduction and budget padding3. 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 lobbying4. 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