PowerPoint Slides prepared by: Andreea CHIRITESCU

Eastern Illinois University

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Public Goods and Public Choice

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Public Goods1. Private goods

– Rival in consumption– Exclusive– Provided by private sector

2. Public goods– Nonrival in consumption– Nonexclusive– Provided by government

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Public Goods3. Natural monopoly

– Nonrival but exclusive– With congestion: private goods– Provided by private sector or government

4. Open-access good– Rival but nonexclusive– Regulated by government

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Exhibit 1

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Categories of Goods

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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 curve5

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Exhibit 2

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Market for Public Goods

10

5

$15

Dol

lars

pe

r hou

r

20 Hours of mosquito spraying per week

Dm

Da

Marginal cost

D

D

e

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.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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

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Rent Seeking• Rent seeking

– Activity special-interest groups undertake – To secure special favors from

government– No incentive for economic efficiency

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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

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The Underground Economy• 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

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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

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Bureaucracy• Bureaus

– Government agencies• 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

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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

officials13