Study Notes on Microeconomics: Public Goods, Public Choice, and Government Failure
Microeconomics: Public Goods, Public Choice, and Government Failure
Chapter Overview
- Source: McConnell, Brue, Flynn, McGraw Hill.
- Topics Covered:
- Public Goods
- Public Choice Theory
- Voting Paradoxes
- Government Failure
Section 1: Public Goods
Definitions and Characteristics
- Public Goods: Goods provided by the government that are available for free to consumers.
- Characteristics:
- Nonrivalry: Consumption by one individual does not reduce availability for others.
- Nonexcludability: It is not feasible to exclude individuals from using the good.
- Free-rider problem: Individuals can benefit without contributing to the cost of production.
Demand-Side Market Failures
- Occur when it is impossible to charge consumers directly for the product.
- Resulting Effects:
- Some individuals enjoy the benefits without payment.
- Firms may be unwilling to produce goods because they cannot cover costs.
Section 2: Private vs. Public Goods
Private Goods
- Definition: Goods produced and sold in the market by firms.
- Characteristics:
- Rivalry: One person's consumption reduces availability for others.
- Excludability: Producers can prevent non-paying consumers from accessing the good.
Public Goods Revisited
- Public Goods Characteristics Recap: Nonrivalry, nonexcludability, and the free-rider problem further complicate the funding and production of public goods.
Section 3: Demand for a Public Good
Example Demand Scenario with Two Individuals
- Individuals: Garcia and Johnson
- Willingness to Pay Data:
| Quantity of Public Good | Garcia’s Willingness to Pay | Johnson’s Willingness to Pay | Collective Willingness to Pay |
|
|---|
| 1 | $4 | $5 | $9 |
|
| 2 | $3 | $4 | $7 |
|
| 3 | $2 | $3 | $5 |
|
| 4 | $1 | $2 | $3 |
|
| 5 | $0 | $1 | $1 | |
| Optimal Quantity: Determined by collective demand and supply curves based on individual willingness to pay. | | | | |
| | | | |
Section 4: Cost-Benefit Analysis | | | | |
Analysis of Public Goods
- Costs:
- Resources diverted from private good production.
- Potential private goods that will not be produced.
- Benefits:
- Increased satisfaction from the output of additional public goods.
Example: National Highway Construction Project (Costs in Billions)
| Plan | Total Cost of Project | Marginal Cost | Total Benefit | Marginal Benefit | Net Benefit (Total Benefit – Total Cost) |
|---|
| No new construction | $0 | $50 | $90 | $100 | $0 |
| Widen existing highways | $50 | $200 | $150 | $120 | $100 |
| New 2-lane highways | $140 | $350 | $210 | $150 | $70 |
| New 4-lane highways | $240 | $470 | $230 | $160 | -$10 |
| New 6-lane highways | $620 | $580 | $-40 | $200 | -$40 |
Section 5: Quasi-Public Goods
Characteristics
- Definition: Goods that could be provided through the market system, but due to positive externalities, the government intervenes.
- Examples:
Section 6: The Reallocation Process
- Government's Role:
- Taxes individuals and businesses.
- Allocates the funds for the production of public goods.
Section 7: Public Choice Theory
Definition and Concepts
- Public Choice Theory: Economic analysis of government decision-making, which includes disciplines such as politics and elections.
- Explores concepts of market failure and government failure.
Section 8: Voting and Preference Revelation
Inefficient Voting Outcomes
- Outcomes:
- Inefficient "No" Vote: Results in underproduction and misallocation of resources.
- Inefficient "Yes" Vote: Causes overproduction and leads to overallocation of resources.
- Influences: Interest groups and logrolling.
Paradox of Voting
- Definition: Situations in which consistent ranking of society’s preferences through paired-choice majority voting is unattainable.
- Voting outcomes may vary depending on the order in which votes are cast.
- Example Preference Scenario: Garcia, Johnson, and Lee Specific Preferences
- National Defense ranked by Garcia (1st), Johnson (3rd), Lee (2nd).
- Road ranked by Garcia (2nd), Johnson (1st), Lee (3rd).
- Weather Warning System ranked by Garcia (3rd), Johnson (2nd), Lee (1st).
- Voting Outcomes:
- National Defense vs. Road: Winner - National Defense (Garcia and Lee).
- Road vs. Weather Warning System: Winner - Road (Garcia and Johnson).
- National Defense vs. Weather Warning System: Winner - Weather Warning System (Johnson and Lee).
- Concept: Suggests the outcome of an election is likely to be determined by the median voter, who holds the central position on an issue.
- Individuals can express dissatisfaction with median preferences by “voting with their feet.”
- Median preferences are subject to change over time.
Alternative Voting Mechanisms
- Quadratic Voting: Allows voters to purchase and cast as many votes as desired, which can lead to comprehensive representation of preferences.
Section 9: Government Failure
Definition and Implications
- Government Failure: Refers to inefficient outcomes arising from government actions.
- Sources of Failure:
- Voting problems.
- Principal-agent problem: Issues arise when an agent's interests do not align with the principal’s.
- Special-interest effects.
- Collective-action problems.
- Pork-barrel politics and earmarking funds.
- Rent-seeking behaviors.
Section 10: Limited and Bundled Choices
- Political Constraints: Limited candidate options in elections often lead to bureaucracy and inefficiency.
- Concerns: Public agencies tend to be less efficient than private businesses without profit-loss tests.
- Government employees may obtain political clout, thereby justifying their positions without measures of performance.
Section 11: Regulatory Fairness and Intervention
Regulatory Capture
- Definition: Occurs when regulations are influenced by the firms being regulated, typically leading to unfavorable laws.
- Examples:
- Pharmaceutical Industry
- Financial Services (Wall Street)
- Federal Land Leasing
Deregulation
- Context and implications on public good production and economic markets.
Section 12: Political Corruption
Definition and Types
- Political Corruption: Abuse of entrusted powers for personal gain.
- Two Forms:
- Demand for a bribe for illegal actions.
- Bribery to compel government officials to perform regular tasks.
Section 13: Imperfect Institutions
Market versus Government Efficacy
- Both markets and the government face inefficiencies and failures.
- Assigning a service to either the public sector or private sector can be complex due to overlapping capabilities.
Section 14: Conclusion
Government Subsidization of Corporate Relocations
- Examples of local and state governments courting major corporations like Amazon for subsidies.
- Critical view: Final location decisions may occur regardless of government incentives, and usually, the expected return on investment falls short of anticipation.