1. Property Rights and Public Goods

2. Overview Externalities and Property Rights Common Property Resources
Recycling
Common Property Resources
Public Goods & Private Preferences for Public Goods
Benefit-cost Analysis
Public Choice Process 2

3. The Efficient Amount of Recycling
Cost
With a refundable deposit,
MC increases and
MC = MSC = MCR.
MC + per unit refund MC m1
Without market intervention
the level of scrap will be at m1
and m1 > m*.
Households can dispose of glass and other garbage at very low cost. The low cost of disposal creates a divergence between the private and the social cost of disposal. S0, raising MC is a move in the right direction.
MCR
MSC m*
Refund is like a tax for non-compliance, but no tax if there is compliance
Scrap 4 8 12
Extent of recycling 75

4. With refunds Sr increases to S’r and S increases to S’.
Refundable Deposits
S’r S’ P’ M*
With refunds Sr increases
to S’r and S increases to S’. Sv Sr S
The supply of glass S is
the horizontal sum of the
Supply of virgin glass (Sv)
and the supply of recycled
glass (Sr). $ M1 P
Without refunds the
price of glass is P and
Sr is M1. D
Price falls to P’ and
the amount of
recycled glass
increases to M*.
Amount of Glass 80

5. Externalities and Property Rights
Legal rules describing what people or firms may do with their property
For example
If residents downstream owned the river (clean water) they control upstream emissions.
Bargaining and Economic Efficiency
Economic efficiency can be achieved without government intervention when the externality affects relatively few parties and when property rights are well specified. 81

6. PRIVATE SOLUTION TO EXTERNALITIES
Coase Thorem: Economic agents can arrive at an efficient solution (i.e., an optimum assignment of property rights)
irrespective of initial assignment of property rights,
provided they can bargain free of cost (i.e., w/o transaction costs), and
there is no wealth effect to thwart the bargaining process.
Coase Theorem at Work: Negotiating an Efficient Solution New York garbage spill (200 tons) littered the New Jersey beaches
The potential cost of litigation resulted in a solution that was mutually beneficial to both parties.

7. Coase Theorem MC of pollution abatement by factory
MC of pollution to fisheries
OE is optimal quantity of pollution and O’E is the corresponding optimal quantity of abatement
At E, the marginal costs of pollution and abatement are equal, and the sum of the total costs i.e. triangle OXO’ is the least
At A, MC of abatement exceeds MC of pollution, so it is cheaper to compensate the fishermen AB than to abate the pollution AC C L
Demand price for
abatement now
higher to facilitate
pollution reduction X
Demand price
for abatement
falls short B O O’ A E F
Pollution
Abatement

8. Common Property Resources
Everyone has free access.
Likely to be over-utilized
Examples
Air and water
Fish and animal populations
Minerals
Solution
Private ownership
Question
Wouldn’t private ownership be impractical? 94

9. Common Property Resources
Private Cost FC
Without control the number
of fish/month is FC where
PC = MB (marginal benefit).
Benefits,
Costs
($ per
fish)
However, private costs
underestimate true cost.
The efficient level of
fish/month is F* where
MSC = MB (D)
Marginal Social Cost F*
Demand
Fish per Month 98

10. Crawfish Fishing in Lousiana
Finding the Efficient Crawfish Catch
F = crawfish catch in millions of pounds/yr
C = cost in dollars/pound
Demand
C = = F
MSC
C = F PC
C = F
Efficient Catch
9.2 million pounds
D = MSC

11. Crawfish as a Common Property Resource
Cost
(dollars/pound)
Marginal Social Cost
Private Cost
11.9
2.10
9.2
0.325
Demand
Crawfish Catch
(millions of pounds) 98

12. Public Goods Public Good Characteristics
Non-rival
For any given level of production the marginal cost of providing it to an additional consumer is zero.
Non-exclusive
People cannot be excluded from consuming the good.
Not all government produced goods are public goods
Some are rival and non-exclusive (more like a common property resource)
Education
101

13. Common Property Resource
Typology of Goods
Characteris-tics
Excludable
Non-excludable
Rival
Private Good
Common Property Resource
Non-rival
Club Good
Public Good

14. Efficient Public Good Provision
Benefits
(dollars) D1 D2 D
When a good is non-rival, the social marginal
benefit of consumption (D) , is determined by
vertically summing the individual demand
curves for the good.
$7.00
$5.50
Marginal Cost
$1.50
Efficient output occurs
where MC = MB at 2
units of output. MB is
$ $4.00 or $5.50.
$4.00
Horizontal sum of demand curves
What if this is the MC curve?
Output 1 2 3 4 5 6 7 8 9 10
105

15. Problem with Public Goods
Free Riders
There is no way to provide some goods and services without benefiting everyone.
Households do not have the incentive to pay what the item is worth to them.
Free riders understate the value of a good or service so that they can enjoy its benefit without paying for it.
Clean Air is a public good
Non-exclusive and non-rival
What is the price of clean air?
107

16. How to know Private Preferences for Public Goods?
Government production of a public good is advantageous because the government can assess taxes or fees to pay for it.
Determining how much of a public good to provide when free riders exist is however extremely difficult.
114

17. The Demand for Clean Air
Dollars
Low Income
Middle Income
High Income
3000
2500
2000
1500
1000
500
Nitrogen Oxides
(pphm) 1 2 3 4 5 6 7 8 9 10
112

18. Findings on Demand for Clean Air
Amount people are willing to pay for clean air increases substantially as pollution increases.
Higher income earners are willing to pay more (the gap between the demand curves widen)
National Academy of Sciences found that a 10% reduction in auto emissions yielded a benefit of $2 billion---somewhat greater than the cost.
113

19. Exercise 7, p.653: Willingness to pay for different quantities of the public good
Time G-1 G-2 G-3 V.Sum

20. Exercise 7, p.653: Willingness to demand the private good at different prices
Price G-1 G-2 G-3 H.Sum

21. Benefit-cost Analysis
Compares present value of benefits to present value of costs of a government project, which is mostly in the nature of public goods
Helps ranking projects in terms of benefit-cost ratio (must be >1) until available limited resources are exhausted
Difficulties in BC ratio estimation:
Correctly estimating benefits & costs in the future, especially their opportunity costs
Many benefits and costs - often in the nature of intangibles - are not quantifiable
Choice of interest rate for discounting poses a very serious problem & hence sensitivity analysis is performed to choose across different alternative rates
Hence, BC analysis still a subjective art rather than an objective science

22. Public Choice Process Broad groups Major characteristics
1. Voters Voting for policies favoring their interests
Generally less informed about political decisions than their market decisions – referred to as ‘rational ignorance’
- less need to gather information as elected leaders are empowered to take decisions on their behalf
- very expensive to gather information on public choice
- voters have less influence on and lesser affected by public choice as compared to market choice
2. Politicians As counterpart of firm entrepreneurs/managers, seek to maximize chance of re-election
Often responds to desires of small, well-organized, well-informed, well-funded, passionate & vocal interest groups at the cost of mostly silent and uninformed majority

23. Public Choice Process Broad groups Major characteristics
3. Interest groups Organize lobbies and support politicians willing to serve their interests, although laws & regulations are invariably rationalized in terms of national interest
4. Bureaucrats Often implements policies under monopoly conditions w/o caring for efficiency, unless there is pressure of competition to compete and coordinate
Often non-neutral and non-passive, actively trying to influence policy & its implementation
Hence as a special interest group within government contributes to size & growth of the bureau

24. Some Institutional Changes Suggested to prevent ‘Government Failure’
Informing, educating & organizing voters
Contracting out government services not entirely public good in nature
Encouraging inter-agency competition
Referendum & thus frequently reverting to direct democracy
Specify total amount of funds to be allocated across competing uses.