ECO 481: Public Choice Theory

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ECO 481: Public Choice Theory The Rationale for Government Dr. Dennis Foster

Market Failure Non-excludable & non-rival. Free rider problem. The Case of Public Goods: Non-excludable & non-rival. Free rider problem. Private markets will “underprovide.” Graphical representation. The Case of Negative Externalities: Private markets will “overprovide.”

Welfare Economics Market is not exhausting all advantageous trade Sources of market failure: Market is not exhausting all advantageous trade Public Good & positive externality. Negative externalities. Information problems. Market instability. Policy prescriptions: Persuasion/Regulation/Gov’t Expenditure

Rethinking Market Failure The Market Process: The coordination of activity. What do people want? The competing use of scare resources. How much is right? The role of prices. The role of profit & loss. I, Pencil and Milton Friedman’s version. Markets need . . . stable legal structure (?)

Assessing Market Failure Public Goods: How much is right? The “well balanced” transportation system. How do you finance? Free rider is replaced by “forced rider.” Does that really alleviate this “problem?” Should any good with MC=0 be provided? How would the market respond? Bus vs. cab example.

Assessing Market Failure Imperfect Competition & Information Issues: Monopoly harm . . . to whom? Is there such a thing as “predatory pricing?” Monopoly shortcomings & government. Political response of anti-trust laws. Can we actually have perfect information? Hayek and the market process.

Markets reward contribution, not effort. Distribution Issues: Markets reward contribution, not effort. Is there an “arbitrary distribution of natural abilities?” Star Parker - what does gov’t redistribution do? How many are on food stamps? Who benefits from food stamps? Stossel and cotton subsidies.

Market Failure Standardizing - weights and measures. Transaction Costs & Regulation: Standardizing - weights and measures. Can’t markets reduce these costs? Do regulations really reduce these costs? Stossel video (Institute for Justice) Coyote blog Toys Do businesses like to compete?

ECO 481: Public Choice Theory The Rationale for Government Dr. Dennis Foster