Private vs Public Goods

1. Private vs Public Goods What difference does it make? Would you like government to provide you free college? What might you have to give up to get it?

2. Three areas of concentration • Explain how market failures, such as externalities, might justify economic functions of government • 2. Distinguish between private and public goods and explain the nature of the free-rider problem • 3. Describe the political functions of government that entail its involvement in the economy

3. What is Market Failure? • When the market produces more or less than the ideal optimal good or service. OR the wrong mix of input is given for output….. • Brings about externalities and public goods.

4. When the market fails… it is a double edge sword Market Fails if not optimal mix. * Optimal Mix of Output…… “Most desirable combination of output attainable with existing resources, technology and social values.” Market Failure *“An imperfection in the market mechanism that prevents optimal outcomes.”

5. Problem in economy- Hydrocarbons in the air. Problem in economy- Hydrocarbons in the air. Cause- SUV’s, Trucks (poor ignition system, etc.) Solution – Do not manufacture SUVs, Trucks. Regulation prevents- government permits only electric cars and small cars. Trucks still on road – Reallocation of resources to government’s choice? What about just taxing SUVs more rather than not permitting production?

6. Price directs resources • Business is operating to make a profit • Why would Dell want to build a park? • Why would Wal-Mart want to pay high wage? • Why would Texas not provide health insurance for poor?

7. In real words?Wrong mix of output Not enough public parks… Not enough care for environment… Not enough welfare… Too much separation between top 10% income earners and median income earners… Not adequate security within our borders…. Too many immigrants….

8. How do you know if optimal mix is met? Optimal mix of ANY GOOD or SERVICE = MB = MC (Marginal benefit = Marginal Cost) If the cost exceeds the benefit… the failure occurs. If benefit exceeds the cost, then market is functioning according to other factors (price, demand, etc.)

9. Plano City Council issues “no smoking” in restaurants, bars, or outside bars on patios. What is the marginal private cost to Sports Bar? What is the external cost to Plano? What is the social cost? C > B?

10. The smoke in Sports Bar= externality What is an externality? Result of an economic activity that harms a third person. (breathing smoke in restaurant) Negative externality (also referred to as spillover) Can also have a positive externality.

11. Specific Example: Assume no government regulation exists. Steel producing plant moves into the neighborhood. Production of steel emits dirt, smut, unhealthy air throughout the neighborhood. This is a negative externality… the spillover is the dirty air borne by the citizens. Who pays for this cost? Citizens- company making a profit on steel.

12. Socially Optimal Amount (Output) • Sometimes, the socially optimal amount is referred to as the efficient amount.

13. Correcting for Externalities (cont'd) Market failure: an example Market failure occurs Steel mill does not pay for the clean air Costs of production have “spilled over” to the residents (third parties) Lower production cost ***More steel is produced than would otherwise be the case

14. Market failure = (forces of S & D not leading us to BEST point on ppc… Who decides what is defined as BEST? Enter…. Government intervention! Did you hear the words tax and subsidy? Will they perform magic?

15. Correcting for Externalities Externalities Occur when the consequences of an economic activity spill over to affect third parties Third Parties Parties who are not directly involved in a given activity or transaction Property Rights Rights of an owner to use and exchange property

16. Examples of spillovers • Throwing trash in someone’s back yard • Burning ties in the alley • Playing your stereo loudly at 3:00 a.m. • Businesses dumping wastes, sludge into rivers • People trashing the beach or highway. • Electric Companies burning phosphorous fuels

17. Spillover Examples that perpetrate on others • Calling police when loud party of teenagers next door (actions of teens imposing unwanted cost on neighbor) • Living in downstairs apartment.. Having upstairs neighbors doing Tai Bo when they get off work at 4:00 a.m. • Calling the city when a neighbor doesn’t keep his yard mowed on regular basis.

18. Externalities can be positive or negative • Homeowners keep lawns immaculate (benefits the neighborhood) • Scientific study for polio vaccine (others benefit beyond scientists’ recognition) • Education……. How would this be a benefit?

19. How can spillovers be corrected? Most obvious way is Legislation. • To prohibit • To heavily tax the specific product and manufacturer. Tax would be derived to allow for off-setting the clean-up cost. (Super Fund is example) • ***Tax incentives… if reduction of pollution and compliance adhered to, taxes reduced.

20. There are two main types of economic instruments used in environmental policy, both of which aim to provide an incentive to use resources sustainably: • Price-based measures use charges, taxes and subsidies to persuade polluters to reduce their discharges. • Rights-based measures "create rights to use environmental resources, or to pollute the environment, up to a pre-determined limit, and allowing these rights to be traded"

21. Two concepts to remember • Public goods… can be equally consumed by all… no restrictions Skateboarding in the park… Terrorists… can also go to the park… Illegal immigrants can go to school… • Private goods… consumption by one person excludes consumption by another.. ( my doughnut… my car… etc)

22. The Public Sector:Government’s role. • What is Public Sector? • When markets fail? (Housing!) • Should government step in? • Can people “ride free” in public sector?

23. Let’s Talk Social Costs. • Social Cost = private cost + externality (if any)

24. That’s All Folks!