Public Goods and Public Choice

Public Goods Private goods Public goods Rival in consumption Exclusive Provided by private sector Public goods Nonrival in consumption Nonexclusive Provided by government

Public Goods Natural monopoly Open-access good Nonrival but exclusive With congestion: private goods Provided by private sector or government Open-access good Rival but nonexclusive Regulated by government

Exhibit 1 Categories of Goods

Optimal Provision of Public Goods Nonrival in consumption Once produced: available to all consumers Market demand curve Vertical sum of individual demand curves Marginal benefit Efficient level of public good Market demand curve intersects marginal cost curve

Exhibit 2 Market for Public Goods Because public goods, once produced, are available to all in identical amounts, the demand for a public good is the vertical sum of each individual’s demand. Thus, the market demand for mosquito spraying is the vertical sum of Maria’s demand, Dm, and Alan’s demand, Da. The efficient level of provision is found where the marginal cost of mosquito spraying equals its marginal benefit. This occurs at point e, where the marginal cost curve intersects the market demand curve, D. 10 5 $15 Dollars per hour D Marginal cost e Da Dm 2 Hours of mosquito spraying per week

Paying for Public Goods Public goods are paid for through taxation. Some households have greater ability to pay taxes than others Efficient, but not fair Free-rider problem People try to benefit from the public goods without paying for them

Rent Seeking Rent seeking Activity special-interest groups undertake To secure special favors from government No incentive for economic efficiency

Campaign finance reform Special-interest money Donated by special-interest groups Soft money Allows political parties to raise unlimited amounts from individuals, corporations, and labor unions To spend it freely on party building activities

The Underground Economy Unreported market activity To avoid taxes Illegal Tax avoidance Legal - Pay least possible tax Tax evasion Illegal - No or fraudulent tax return

The Underground Economy Underground economy grows more when: Government regulation increase Tax rates increase Government corruption is more widespread Estimated: $1.5 trillion in 2010

Bureaucracy Bureaus Government agencies Receive less consumer feedback Charged with implementing legislation Financed by appropriations from legislative bodies Receive less consumer feedback Less incentive to act on any feedback Less incentive to eliminate waste and inefficiency

Bureaucracy in Repr. Democracy Bureaucratic objectives Serve the public Maximize budget Larger budget than desired by median voter Private vs. public production Private production – may be more efficient Public production – preferred by public officials