Public Goods and Services

What Kind of Economy does the US have? We have a MIXED free-market economy… Because although MOST goods and services are provided by private businesses… There is also LIMITED GOVERNMENT INVOLVEMENT… And so some ESSENTIAL goods and services are provided by the government.

Public Goods A public good is a good or service that is provided by the GOVERNMENT. The government controls the PUBLIC SECTOR of the economy. Everything else is provided by the PRIVATE SECTOR. Which sector of the US economy is BIGGEST? The PRIVATE SECTOR.

Why Must the Government Provide Some Goods and Services? With most products, if you cannot or will not pay, what happens? YOU DON’T GET IT. But there are some products from which we CANNOT exclude non-payers… And if we cannot EXCLUDE non-payers from using something, the government must provide it. We cannot tell certain people that they are PROHIBITED from using sidewalks and roads… We cannot tell certain people that they will not be protected by law enforcement… So, the government must provide these things.

The Free Rider Problem Public goods are also necessary due to the “Free Rider” problem… Public goods are also necessary due to the “Free Rider” problem… Public goods are usually impossible for a private business to establish a one- to-one link between payment & receipt. Public goods are usually impossible for a private business to establish a one- to-one link between payment & receipt. Suppose an area has a terrible mosquito problem… Suppose an area has a terrible mosquito problem… And a neighbor decides to create a neighborhood fund to pay for mosquito control. And a neighbor decides to create a neighborhood fund to pay for mosquito control. And then asks every neighbor to contribute $25.00 for the service. And then asks every neighbor to contribute $25.00 for the service. What would happen? What would happen?

Which of the following is NOT an example of a public good? A.) a cheeseburger from McDonalds. B.) a cheeseburger from the school cafeteria. C.) this class. D.) the Powder Springs Post Office.

Stupid People Finally, public goods have to be provided because many people are very stupid. Finally, public goods have to be provided because many people are very stupid. Let’s say that fire departments were privately owned and NOT run by the government. Let’s say that fire departments were privately owned and NOT run by the government. And people could choose to buy “fire protection” for $75 a month, or they could choose to spend the money on something else. What would probably happen? And people could choose to buy “fire protection” for $75 a month, or they could choose to spend the money on something else. What would probably happen? Some people, if given the option, would not choose to pay for fire protection… Some people, if given the option, would not choose to pay for fire protection… But if their house were to catch fire, it could spread to yours… But if their house were to catch fire, it could spread to yours… So the government has decided to provide fire protection to everybody, whether they want to pay for it or not. So the government has decided to provide fire protection to everybody, whether they want to pay for it or not.

Market Failure All of the previous situations were examples of market failure-- A situation in which the free market does not provide a good or service efficiently. Whenever market failure occurs, the government should provide the service.

Externality: An economic side effect of a good or service that generates benefits or costs to someone other than the person who decides how much to produce or consume.

Positive Externality These occur when a business transaction is conducted… And somebody OTHER than the buyer and seller receive unexpected benefits. Example—Mrs. Garland buys an old house that is an eyesore in the neighborhood… She fixes it up, repaints it, plants flowers, etc. Her neighbors were not involved in this decision… But they benefit because the neighborhood looks nicer…property values have risen, etc… The government often tries to ENCOURAGE positive externalities.

Negative Externality Some transactions generate unintended costs… Negative Externalities cause part of the cost of a transaction to be paid by somebody other than the buyer or the seller. Example—Cool C buys a gun… From MC Shy D… And shoots Big Daddy Kane. Big Daddy Kane has SUFFERED as a result of the transaction between Cool C and MC Shy D. The government DISCOURAGES negative externalities.

Which of the following is an example of a situation that would cause NEGATIVE externalities? A.) getting a speeding ticket. B.) buying lunch at the school cafeteria. C.) a fight at McEachern high school. D.) food stamps from the Government.

Which of the following is the best example of a situation that would cause POSITIVE externalities? A.) a coupon for a free haircut. B.) the development of new computer software. C.) the election of a corrupt governor. D.) the bankruptcy of a newspaper.

The Poverty Threshold ► The Poverty Threshold—an income level below that which is needed to support families or households. ► In 2011, the line for a single-person household was $10,890… ► And for a four-person household--$22,350. ► Families living below this threshold usually qualify for…

Welfare Welfare—government aid for the poor. The system began under Franklin Roosevelt during the Great Depression… And was expanded by Lyndon Johnson in the 1960s’ War on Poverty.

Types of Welfare: “The Welfare Check” The official name of this program is “TANF”—Temporary Assistance to Needy Families. It provides cash aid to families with dependent children. Critics argue that TANF provides TWO “perverse incentives”… 1. Recipients tend not to take advantage of educational opportunities that might lead to higher-paying jobs…WHY? 2. Recipients might be tempted to have additional children…WHY?

Other Types of Government Aid Food Stamps—most families who are eligible receive $ /month to help purchase food items. Section 8—the US government currently pays rent to private landlords for approximately 3 million Americans. Medicaid—provides free or reduced-cost medical coverage to Americans living in poverty. DO NOT CONFUSE THIS WITH… Medicare—which is NOT a welfare program… Medicare provides free medical coverage to ALL Americans over the age of 65. Social Security is also NOT a welfare program—it is available to ALL Americans, irrespective of income.

Which of the following is NOT example of welfare? A.) food stamps. B.) medicaid. C.) social security. D.) section 8.