Chapter 17 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Government 17-2

Chapter Outline Public Goods Public Choice Income Distribution 17-3

Public Goods Pure public good: a good that has a high degree of nondiminishability and nonexcludability. –Each person must consume the same amount of it. Collective good: a good that is excludable and has a high degree only of nondiminishability. 17-4

Figure 17.1: The Aggregate Willingness-to- Pay Curve for a Public Good 17-5

Figure 17.2: Equilibrium in a Market for Jointly Produced Products 17-6

Figure 17.3: Optimal Provision of a Public Good 17-7

Paying For Q* If the government is to produce Q* units of a public good, it must somehow raise sufficient tax revenue to cover the total production costs of that amount. The willingness to pay for public goods is generally an increasing function of income. –The rich, on the average, assign greater value to public goods than the poor do, not because they have different tastes but because they have more money. 17-8

Private Provision Of Public Goods How can the good be paid for, if not by mandatory taxes? Funding by Donation –Free riding: choosing not to donate to a cause but still benefiting from the donations of others. Sale of By-Products Development of New Means to Exclude Nonpayers Private Contracts Clubs 17-9

Figure 17.4: The Trade-Off between Privacy and Cost 17-10

Figure 17.5: The Power of the Median Voter 17-11

Public Choice Majority voting: by this standard, projects favored by a majority—in either a direct referendum or a vote taken by elected representatives—are adopted and all others are abandoned

The Median Voter Theorem The median voter theorem states that whenever alternatives can be ranked according to their closeness to each voter’s ideal outcome, majority voting will always select the alternative most preferred by the median voter. –Median voter: the voter whose ideal outcome lies above the ideal outcomes of half the voters. –Single-peaked preferences preferences that exhibit a single most-preferred outcome, with other outcomes ranked lower as their distances from their most- preferred outcome increases

Cost-benefit Analysis Cost-benefit analysis: an alternative to majority voting that attempts to take explicit account of how strongly people feel about each of the alternatives under consideration

The Rawlsian Criticism Of The Marginal Productivity System The most common criticism to the marginal productivity system is that it often generates a high degree of inequality

Rawls Experiment “What constitutes a just distribution of income?” To answer using the following thought experiment: –Imagine that you and the other citizens of some country have been thrown together in a meeting to choose the rules for distributing income. This meeting takes place behind a “veil of ignorance,” which conceals from each person any knowledge of what talents and abilities he and others have. No individual knows whether he is smart or dull, strong or weak, fast or slow, and so on— which means that no one knows which particular rules of distribution would work to his own advantage 17-16

Fairness and Efficiency Inefficient solutions make the economic pie smaller for everyone, rich and poor alike. –If efficient solutions are adopted, it must be possible for everyone to receive a larger slice

Figure 17.6: Charging for Directory Assistance 17-18

Methods Of Redistribution Our Current Welfare Programs The Negative Income Tax (NIT) Public Employment for the Poor (JOBS) A Combination of NIT and JOBS 17-19

Figure 17.7: Benefits versus Income for a Typical Welfare Program 17-20

The Negative Income Tax Gives every man, woman, and child—rich or poor—an income tax credit that is large enough to sustain a minimally adequate standard of living. –Someone who earned no income would receive this credit in cash. People with earned income would then be taxed on their income at some rate less than 100 percent

Figure 17.8: A Negative Income Tax Program 17-22

Figure 17.9: Income Source in the NIT-JOBS Program 17-23