6.2: Public and Private Goods

Public V. Private Goods

• Public Sector: The Part Of The Economy That Is Primarily Controlled By The Government
• Private Sector: The Part Of The Economy That Is Run By Private Individuals And Companies That Seek Profit
• Public Goods
  • Must Exist Because It’s Impractical For The Free-market To Provide These Goods Because There Is Little Opportunity To Earn Profit
  • This Is Due To The Free-rider Problem
  • Free Rider: An Individual That Benefits From Something Without Paying For It
  • Free Riders Keep Firms From Making Profits; If Left To The Free Market, Essential Services Would Be Under Produced

Definition Of Public Goods

• Public Goods Have Two Criteria

  1. Non-exclusionary: Cannot Exclude People From Enjoying The Benefits, Even If They Don’t Pay

     1. Eg. National Defense

  2. Shared Consumption (non-rival): One Person’s Consumption Of A Good Does Not Reduce Its Usefulness To Others

     1. Eg. City Parks

Antitrust Laws

• Antitrust Law: A Law Designed To Prevent Monopolies And Promote Competition
• Monopolies Are Market Failures Because They Destroy Competition

Regulating Monopolies

• Reasoning: Keep Prices Low, Make Monopolies Efficient

• Method: Price Ceilings

  • Where Should Price Ceilings Be Placed?

  1. Socially Optimal Price

     1. P=MC (allocative Efficiency)

  2. Fair-return Price

     1. Normal Profit

Taxes

• Tax: A Mandatory Payment Made To The Government To Cover Costs Of Governing

• Two Purposes

  1. Finance Government Operations

     1. Public Goods

  2. Influence Economic Behavior Of Firms And Individuals I Hate British People

Three Types Of Taxes

1. Progressive Taxes — Take Larger Percentages Of Income From Higher Income Groups
2. Proportional Taxes (flat Rate) — Takes The Same Percentage Of Income From All Income Groups
3. Regressive Taxes — Takes A Larger Percentage From Low Income Groups (takes More From Poor People)

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