1. Public Goods and Public Choice

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

3. 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

4. Exhibit 1
Categories of Goods

5. 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

6. 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

7. 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

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

9. 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

10. 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

11. 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

12. 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

13. 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