Chapter 3.3 Public Goods and Government Essential Question: Why does a society provide public goods? 1

Objectives Identify examples of public goods. Analyze market failures. Evaluate how the government allocates some resources by managing externalities.

New Park: Who Should Pay For It? Uptown is going to build a new park that is a gorgeous place that provides recreation services What benefit does the park provide to you? How much would you pay to use the park? If you are using the park, can other people use it as well? 100 people have paid to build the park. Will the 101st person still be able to use the park? How will you prevent them from using it? Will people be upset if they are not allowed to use a park in their own neighborhood? If everyone was allowed to use the park, how would the first 100 people who paid feel about this? Will any of the surrounding homes or businesses benefit from the new park?

Market Failures Market Failures are where the free market does not distribute resources efficiently or charge the right price for a good or service Some examples of market failures are: Public Goods / Non-Rival Goods Externalities (especially Negative Externalities) Checkpoint Answer: Because the free market can not distribute public goods efficiently.

Public Goods and Market Failure A public good is a shared good or service for which it would be inefficient or impractical: to make consumers pay individually to exclude those who do not pay. Public goods are a market failure Firms in free markets will not provide these goods or services on their own Households will not pay for these goods/services on their own

Public Goods and Market Failure Public goods can be used by any number of consumers without reducing the benefits to any single consumer. These are called non-rival goods

Public Goods and Free Rider Problem One issue with public goods is known as the “free-rider problem.” Free riders are people who are not willing to pay for a particular good or service but would benefit from it if it were offered as a public good. Think “free loaders” If I pay for a street light or a road, free riders will benefit from it and I can’t prevent them from using it

Examples of Public Goods Inefficient to charge prices individually Inefficient to prevent people from using it Free riders will benefit even if they don’t pay for the good/service INFRASTRUCTURE (roads, ports, transit, communication) 8

Externalities Externality is a benefit or a cost that is not captured in the price Positive or negative side effect not paid for by the producer or consumer Positive Externalities Allow someone who did not purchase a good to enjoy part of the benefits of that good Examples: a new park would increase the value of homes nearby, but homeowners did not pay for the park A new road or highway might bring more people to a town, which will help local businesses grow, but the local businesses did not pay for the road

Externalities, cont’d. Negative Externalities Represent the negative/cost side effects of public goods Part of the cost or side effect of producing a good or service is paid for by someone other than the producer. Example: A coal-fired power plant produces electricity, but also has the negative externality of polluting the air. The power company does not pay for the cost of pollution, the neighbors “pay for this cost” by breathing polluted air Answers: It is positive because it means more business for nearby gas stations and restaurants and it is negative because it increases construction and traffic noise in the area.

Externalities, cont’d. A rural town is considering extending the highway through their town. Why would the construction of the new highway be considered a positive externality by some people and a negative externality by others? Positive Externalities Negative Externalities Answers: It is positive because it means more business for nearby gas stations and restaurants and it is negative because it increases construction and traffic noise in the area. 11

Public Goods and Market Failure Road construction is a public good. Explain how road construction is a market failure? Free-Rider Problem: If I paid for a road on my street, my neighbors could still use it Externalities: Roads might bring more traffic and pollution to an area (negative) or more stores and businesses to an area (positive) Public Good: Roads are shared and it is inefficient/impractical to charge people to use the road or prevent people from using it Checkpoint Answer: Because the free market can not distribute public goods efficiently. 12

The Role of Government Who Pays For Public Goods? Since the free market doesn’t provide public goods, government must provide public goods The government will only pay for the cost of a public good if: The total benefits to society are greater than the total cost. Lots of political controversy how costs/benefits are measured Checkpoint Answer: 1) The benefit to each individual is less than the cost that each individual would have to pay if it were provided privately. 2) The total benefits to society are greater than the total cost.

Role of Government: Regulation and Externalities The government may take action to create positive externalities Government builds more parks; positive externality is healthier citizens Government provides more scholarships; positive externality are workers with more skills for companies The government aims to limit negative externalities (most regulation) Government passes the Clean Air Act, there is less air pollution

Objectives Identify examples of public goods. Analyze market failures. Evaluate how the government manages externalities. Roads, street lights, parks, fire dept. Goods/services hard to charge people individually and to exclude those who don’t pay from using it. Market failure is where the free market fails to provide a good/service. Public and non-rival goods are examples of mkt failure. Free rider problem is biggest reason: can’t exclude non-payers, so no one is willing to pay. Government must provide these goods/services. Regulations to minimize negative externalities. Programs to encourage positive externalities

Key Terms free rider: someone who would not be willing to pay for a certain good or service but who would get the benefits of it anyway if it were provided as a public good market failure: a situation in which the free market, operating on its own, does not distribute resources efficiently (need government intervention) externality: an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume (pollution, living next to a park)

Key Terms , cont. public good: a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who did not pay non-rival good: a good or service that can be used by any number of consumers without reducing the benefits to any single consumer (public goods are non-rival; think of riding the train) public sector: the part of the economy that involves the transactions of the government private sector: the part of the economy that involves the transactions of individuals and businesses infrastructure: the basic facilities that are necessary for a society to function or grow – like roads, ports, canals, public transit (usually a public good)