CHAPTER 3: SECTION 3: Providing public good

Transcription

1 CHAPTER 3: SECTION 3: Providing public good

2 Objectives: Identify examples of key terms. Analyze market failures. Evaluate how the government allocates some resources by managing externalities. Evaluate government roles in preventing negative externalities

3 Pro_2:9 Then shalt thou understand righteousness, and judgment, and equity; yea, every good path.

4 Public good: A public good is a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who did not pay.

5 Public good: Public good includes National Parks, Military, law enforcement. To simplify, the funding of government projects in the public interest, the government collects taxes.

6 Public good: Non Tax payers have benefits as well. Certain facilities or services, such as libraries or protection from fire should be available for all. Public goods have another characteristic, any number of consumers can use them without reducing the benefits to a single consumer. For the most part, increasing the number of consumers does not increase the cost of providing the public good.

7 Costs and Benefits: Transportation is a vital part of the nation s infrastructure, the basic facilities that are necessary for a society to function and grow. American leaders have long regarded investment in infrastructure, not only as a means to provide needed public goods, but as a way to promote economic growth.

8 Costs and Benefits: Costs and benefits are critical in determining whether something gets produced as a public good. Two cost benefit criteria are: 1. The benefit to each individual is less than the cost that each would have to pay if it were provided privately. 2. The total benefits to society are greater than the total cost.

9 Costs and Benefits: As long as the benefit is for all people that gain exceeds total cost, it makes sense for the government to fund the project.

10 FREE-RIDER PROBLEM A phenomenon associated with public goods is called the free rider problem. A free rider is someone who would not be willing to pay for certain good or service, but would get the benefit of it anyway, if it were provided as a public good. Unlike consumers in the free market, free riders consumes what they do not directly pay for.

11 FREE-RIDER PROBLEM Free riders enjoy the benefit of freeways and emergency fire services regardless of who you are, or; if you are not member of the community. The free-rider problem suggests would happen if the government stopped collecting taxes to fund public services, if it relied on voluntary contributions instead, many people would refuse to give money. Thus, many public services would then have to be eliminated.

12 MARKET FAILURES: Public goods are examples of what some economist calls a market failure, the term market failure does not suggest that the free enterprise system does not work. Rather, it describes a specific situation in which the free market, operating on its own, does not distribute resources efficiently.

13 MARKET FAILURES: To understand market failure, recall how a successful free market operates: choices made by individuals determine what goods get made, how they get made, and who consumes the goods. Profit incentives attract producers, who because of competition provide goods and services that consumers need at prices they can afford.

14 MARKET FAILURES: For example: companies would not choose to build roads, in sparsely populated areas because they would see no chance to earn profits a low population would mean too few drivers to charge. As a result, the criteria for a properly functioning market system do not exist. For this reason, the road-building scenario is a market failure.

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16 Externalities: An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume. Externalities may be either positive or negative.

17 Positive Externalities: The private sector both individuals and businesses can create positive externalities too. Walsh Computers hires underprivileged teenagers and trains them to be computer programmers. Walsh set up this training program to serve its own interests. However, the newly trained workers can be hired by other companies, who benefit from the workers skills without having paid for them.

18 Positive Externalities: In fact, many economists believe that the private sector generates positive externalities more efficiently than the public sector can and at less cost to taxpayers.

19 NEGATIVE EXTERNALITIES: Is generating unintended costs, called negative externalities. Negative externalities cause part of the cost of producing a good or service to be paid for by someone other than the producer.

20 NEGATIVE EXTERNALITIES: A factory dumps chemical waste into a nearby river, making it unhealthy. The city is forced to install special equipment at its water treatment plant to clean up the chemicals. The community, not the polluter, is paying the cost of cleaning up the river.

21 GOVERNMENT GOALS: Externalities are a sign of market failure because the costs of benefits of a good or service are not assigned properly. Understanding externalities helps us see another role that the government plays in the American economy.

22 GOVERNMENT GOALS: The government may take action to create positive externalities. For example, education. (The government aims to limit negative externalities, such as pollution. Pollutants from coal-burning power plants and auto emissions can drift high into the atmosphere and come down in the form of acid rain. To address this negative externality, the federal government now requires new cars to have an expensive antipollution device called a catalytic converter.

23 GOVERNMENT-DRIVEN OR MARKET-DRIVEN SOLUTIONS? Economists think that the private sector produces more positive externalities than the government does. This belief was spurred debate over how to stop damage to the environment. Since the 1970s the government has often tried to halt pollution by creating strict regulations. Many economists think this approach is inefficient.

24 GOVERNMENT-DRIVEN OR MARKET-DRIVEN SOLUTIONS? These economists want the government to allow market-driven solutions to environmental problems. In this approach, government still plays role by setting standards that industries would have to meet. Individual firms, though, would have more freedoms to meet these goals.

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26 Discussion Question o With global warming becoming more of a problem, do you think governments need to pass stronger laws to force companies to change their practices? Or should it be voluntary?