Interventions

1. Interventions Lesson 20: Government and Public Goods

2. The Rules of the Game • Rule of Law exists when rules that govern behavior and interactions among individuals and groups of individuals apply to both the governed and the governing. • Rule of Man exists when laws are applied at the discretion of the governing. • Under the Rule of Force, people own what they can defend.

3. What Should Government Do? • Limited power of central government • Life, liberty, pursuit of happiness (self interest, profit) • Establish and enforce protection of property rights • Government should do what citizens cannot do!

4. Private vs. Public Sectors • The private sector is made up of households, businesses, and the international sector. • Producers and Consumers • The public sector refers to activity by the various levels of government. • Consumers and Thieves

5. The Economic Functions of Government • Enforce Laws and Contracts • Protect Private Property

6. The Economic non-Functions of Government • Maintain Competition • Redistribute Income • Provide an Economic Safety Net • Provide Public Goods • Nonexclusion • Shared consumption • Correct Market Failures • Provide market information • Correct negative externalities • Subsidize goods with positive externalities • Stabilize the Economy • Fight unemployment • Encourage price stability • Promote economic growth None of these are the functions of true government

7. Market Failures? • Public Goods and Bads (Externalities) • Asymmetrical Information • Moral Hazard • Rule Violations • Monopolies • Business Cycles • All caused by Government

8. How do we evaluate government’s role in the economy? “Government should do those things people cannot do for themselves.” Abraham Lincoln

9. The Opportunity Cost of Government Spending? • At the margin, the opportunity cost of public spending is private spending. • The opportunity cost of government spending on a particular program is the foregone benefit of the other program where the money would have been spent. • Government spending is paid for by taxation, which is involuntary. Therefore, (some) citizens undertake actions to minimize their tax burden – using more resources! • Rob Peter....Pay Paul?? Does this mean gov’t spending is a “bad”?

10. Public Goods or just Goods Provided by/for the Public? Is it possible to exclude people who don’t pay? Are there examples of this good or service being provided privately? Is it possibleto exclude people who don’t pay? Examples of private production? Would people be motivated to pay for the service if it was only provided privately? MB > MC ??

11. Public Goods or just “publically-provided” goods? “True” public goods are Non-rivalrous in consumption One person’s consumption doesn’t reduce the amount available for others to consume Non-exclusive in production The producer/provider cannot exclude people who do not pay (“free riders”) Therefore, there’s no incentive for private producers to provide the product MB > MC

12. Public Goods With public goods, the focus is on groups. With private goods, the focus is on the individual.

13. Public Goods Once a pure public good is supplied to one individual, it is simultaneously supplied to all. • A private good is only supplied to the individual who bought it.

14. Public Goods In the case of a public good, the social benefit of a public good is the sum of the individual benefits. But how do we know???

15. Solutions to the Public Goods Problem • A common solution is for the government to provide the good, but government is not the only solution. • Other solutions are charities and advertising.

16. Public Goods • There are no pure examples of a public good. • The closest example is national defense. • Technology can change the public nature of goods. • Roads are an example.

17. Private Production should take placewhen the marginal benefit exceeds the marginal cost. Government Production should take placewhen the marginal benefit exceeds the marginal cost. Public or Private Production:The Guideline is the Same ≥ MB MC

18. Example: National Defense Would you pay?

19. What about health care?

20. What's wrong with this picture?

21. Concept:  Public good Sunsets are a non-excludable good, in that non-payers can't be prevented from enjoying them.  Other examples of non-excludable goods are national defense, fireworks, and lighthouses.  Private firms tend to under produce non-excludable goods because customers have little incentive to pay for them.  Public goods are both non-excludable and non-rival. 

22. Asymmetric Information • Asymmetric information • Exchange that occurs when one party has more information than the other is called • Adverse selection: the problem that occurs when higher-quality consumers or producers are driven out of the market because unobservable qualities are incorrectly valued.

23. Solutions to Asymmetric Information • Asymmetric information can cause markets to fail – to not allocate goods and services to their highest value use. • A seller must provide credible information about the quality of the good. One approach is to devote considerable resources—to spend money—to demonstrate that the seller is credible. • Another way to inform consumers of the quality of the product is to provide a guarantee against product defects

24. Moral Hazard A related issue is moralhazard—the problem that arises when people change their behavior from what was expected of them when they engage in a trade or contract.

25. Adam Smith and Efficiency • Everyone—consumers, firms, resource suppliers—attempts to get the most benefits for the least cost. • As Adam Smith noted in 1776, self-interested individuals, wholly unaware of the effects of their actions, act as if driven by an invisible hand to produce the greatest social good.

26. Government as the Guardian • An efficient use of resources implies a maximum value of output from a resource base. This is called technical efficiency. • When one person cannot be made better off without making someone else worse off is called economic efficiency. • Government can have neither.

27. Protecting the Food Supply The FDA has issued a rule on the maintenance of records to ensure the Security of the U.S. Food Supply against Bioterrorism. It requires persons who manufacture, process, pack, transport, distribute, receive, hold, or import food to maintain records identifying the source of all food received, and the subsequent recipient of all food released.

28. Lack of Competition Monopoly: a market with only one producer. If one firm controls production economic efficiency can suffer. Governments often regulate monopolies to ensure economic efficiency. Remember only government can create monopolies.

29. Business Cycles • Fluctuations in the economy impact employment rates and income. • People call on the government to protect them against the periods of economic ill health and to minimize the damaging effects of business cycles. • Business cycles create by money supply manipulation (only can be done by government)

30. The “Big Ideas” from Lesson 20 Government interferes with wealth-producing, voluntary exchange and secure property rights. The opportunity cost of government spending is private spending or what else could have been done. Government has been proven to do nothing better than the private sector, thus are there any real public goods? At best, government should be the referee to a superior game.

31. What's Wrong with this Picture?

32. Concepts:  incentives, equilibrium, efficiency Equilibrium is defined as a state in which there is no tendency to change.  In economics, this usually occurs when everyone is doing the best he or she can.  The lanes in this picture aren't in equilibrium because some drivers could do better by moving into the relatively empty lane.  Note that achieving equilibrium -- with cars distributed more evenly among the lanes -- would promote efficiency in that it would help all drivers reach their destinations faster.  In a similar way, the efforts of producers and consumers to promote their interests can result in an efficient market outcome.

33. What's Wrong with this Picture?

34. Concepts:  Incentives, externalities, law and economics We rarely see banana peels on the floor at grocery stores, and it's not because of government regulation.  It's because stores understand that they could be sued for damages if anyone were injured on their property.  Lawsuits can improve economic efficiency by causing firms to internalize some of their external costs. 

35. What's Wrong with this Picture?

36. Concepts:  There's no such thing as a free lunch, incentives, equilibrium According to a popular economist joke, two economists are walking down the street when one sees a dollar on the sidewalk and says so.  "Obviously not," says the other.  "If there were, someone would have picked it up!"   Though the joke intends to mock economists, it's rare to find dollars on the ground because, well, other people have already picked them up.

37. What's Wrong with this Picture?

38. Concepts:  Externalities, opportunity cost Freeway accidents, even if they're off on the side of the road, usually cause traffic jams.  These jams occur because drivers don't take the external cost of their actions into account when they slow down to take a look.  For example, if a driver slows to take a two-second look at an accident, it costs that driver just two seconds of time.  But that one look delays everyone in the lane behind him by two seconds as well.  If there are 1,000 people who are held up in the lane behind the driver, the external cost to society of that one driver's look is about 33 minutes.