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

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Presentation transcript:

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

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

Welfare Economics 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.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.

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

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