Chapter 5: Public Goods, Public Choice, and Government Failure

demand-side market failures

Underallocations of resources that occur when private demand curves understate consumers’ full willingness to pay for a good or service.

private good

A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.

rivalry

The characteristic displayed by certain goods and services that consumption by one person precludes consumption by others.

excludability

The characteristic displayed by those goods and services for which sellers are able to prevent nonbuyers from obtaining benefits.

public good

A good or service that is characterized by nonrivalry and nonexcludability. These characteristics typically imply that no private firm can break even when attempting to provide such products. As a result, they are often provided by governments, who pay for them using general tax revenues.

non-rivalry

The idea that one person’s benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good.

non-excludability

The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good.

free-rider problem

The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.

collective demand for a public good

A schedule or a curve showing the collective willingness to pay of consumers for a public good. Can be found by vertically adding individual demand curves, which is equivalent to adding the respective maximum prices that individual consumers are willing to pay for the last unit of the public good at each possible quantity demanded.

cost-benefit analysis

A method for deciding whether or not to provide a public good that involves a comparison of the total cost of providing that public good with its collective benefit (measured by collective willingness to pay).

marginal cost - marginal benefit rule

A method for deciding whether or not to provide a public good that involves a comparison of the total cost of providing that public good with its collective benefit (measured by collective willingness to pay).

quasi public good

A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.

public choice theory

The economic analysis of government decision making, politics, and elections.

logrolling

The trading of votes by legislators to secure favorable outcomes on decisions concerning the provision of public goods and quasi-public goods.

paradox of voting

A situation where paired-choice voting by majority rule fails to provide a consistent ranking of society’s preferences for public goods or public services.

median-voter model

The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election.

quadratic voting

A majority voting system in which voters can express strength of preference by purchasing as many votes as they like at a price equal to the square of the number of votes purchased. Quadratic voting is more likely (but not guaranteed) to result in economically efficient decisions than traditional one-person-one-vote (1p1v) majority voting systems.

mechanism design

The part of game theory concerned with designing the rules of a game so as to maximize the likelihood of players reaching a socially optimal outcome.

government failure

Inefficiencies in resource allocation caused by problems in the operation of the public sector (government). Specific examples include the principal-agent problem, the special-interest effect, the collective-action problem, rent seeking, and political corruption.

principal-agent problem

(1) At a firm, a conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals’ (stockholders’) goals. (2) In public choice theory, a conflict of interest that arises when elected officials (who are the agents of the people) pursue policies that are in their own interests rather than policies that would be in the better interests of the public (the principals).

special-interest effect

Any political outcome in which a small group (“special interest”) gains substantially at the expense of a much larger number of persons who each individually suffers a small loss.

collective-action problem

The difficulty of getting a large group of voters to organize against a policy when the costs of that policy are widely dispersed (so that none of them individually has much of a personal incentive to take action).

earmarks

Narrow, specially designated spending authorizations placed in broad legislation by senators and representatives for the purpose of providing benefits to firms and organizations within their constituencies. Earmarked projects are exempt from competitive bidding and normal evaluation procedures.

rent seeking

Attempts by individuals, firms, or unions to use political influence to receive payments in excess of the minimum amount they would normally be willing to accept to provide a particular good or service.

regulatory capture

The situation that occurs when a governmental regulatory agency ends up being controlled by the industry that it is supposed to be regulating.

deregulation

The removal of most or even all of the government regulation and laws designed to supervise an industry. Sometimes undertaken to combat regulatory capture.

political corruption

The unlawful misdirection of government resources, or actions that occur when government officials abuse their entrusted powers for personal gain.