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Economics Notes: Public Goods, Common Resources, and Merit Goods, Lecture notes of Economics

Economics

Economics Notes I'm making for my foundation year at oncampus Amsterdam (social sciences path) :)

Typology: Lecture notes

2019/2020

Uploaded on 05/03/2020

sumbel-shahid
sumbel-shahid 🇳🇱

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WEEK 5 – TAXES, PUBLIC GOODS, COMMON
RESOURCES, AND MERIT GOODS
PUBLIC SECTOR VS. PRIVATE SECTOR
PUBLIC SECTOR
-The part of the economy where business activity is owned, financed, and
controlled by the state, and goods and services are provided by the state on
behalf of the population as a whole
PRIVATE SECTOR
-The part of the economy where business activity is owned, financed, and
controlled by private individuals
GROUPING GOODS
Is the good excludable?
-Can people who do not pay for the use of a good be prevented from using
the good? non-excludability
Is the good rival?
-Does one person’s use of the good diminish another person’s ability to use it?
non-rivalry
RIVAL IN
CONSUMPTION
NON-RIVAL IN
CONSUMPTION
EXCLUDABLE PRIVATE GOODS
-Wheat
-Bathroom
fixtures
ARTIFICIALLY
SCARCE GOODS
-On-demand
movies
-Computer
software
NON-EXCLUDABLE COMMON
RESOURCES
-Clean water
-Biodiversity
PUBLIC GOODS
-Public
sanitation
-National
defence
THE FREE RIDER PROBLEM
Consider a public good like national defence – why do these types of goods need
to be provided publicly?
-The free market would fail, horribly, to provide defence if left to themselves
-An individual paying is socially beneficial but not privately profitable
A free rider is someone who receives the benefits of a good or a
service that others have paid for without making any contributions
themselves
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WEEK 5 – TAXES, PUBLIC GOODS, COMMON

RESOURCES, AND MERIT GOODS

PUBLIC SECTOR VS. PRIVATE SECTOR

 PUBLIC SECTOR

  • The part of the economy where business activity is owned, financed, and controlled by the state, and goods and services are provided by the state on behalf of the population as a whole  PRIVATE SECTOR
  • The part of the economy where business activity is owned, financed, and controlled by private individuals GROUPING GOODS  Is the good excludable?
  • Can people who do not pay for the use of a good be prevented from using the good?  non-excludability  Is the good rival?
  • Does one person’s use of the good diminish another person’s ability to use it?  non-rivalry RIVAL IN CONSUMPTION

NON-RIVAL IN

CONSUMPTION

EXCLUDABLE PRIVATE GOODS

  • Wheat
  • Bathroom fixtures

ARTIFICIALLY

SCARCE GOODS

  • On-demand movies
  • Computer software NON-EXCLUDABLE COMMON RESOURCES
  • Clean water
  • Biodiversity

PUBLIC GOODS

  • Public sanitation
  • National defence THE FREE RIDER PROBLEM  Consider a public good like national defence – why do these types of goods need to be provided publicly?
  • The free market would fail, horribly, to provide defence if left to themselves
  • An individual paying is socially beneficial but not privately profitable  A free rider is someone who receives the benefits of a good or a service that others have paid for without making any contributions themselves

HOW SHOULD THE GOVERNMENT INTERVENE FOR PUBLIC GOODS

 DIRECT PROVISION

  • National defence is an example of market failure due to a missing market
  • In the short-run, the supply curve for national defence is fixed
  • To prevent market failure, OB should be produced
  • No price on the demand curve at which OB would be demanded
  • The government must step in and provide OB, whatever the price of defence is CHALLENGES TO THE PROVISION OF PUBLIC GOODSDifficult in estimating value
  • With private goods, buyers reveal the value they place on a good through the prices they are willing to purchase it
  • With private goods, sellers reveal their costs by the prices they are willing to accept
  • Cost-benefit analysis required  Agreeing what are public goods?
  • Examples include: street lighting, police, fire service, fighting poverty; flood control systems COMMON RESOURCESGoods that are rival (one person’s use reduces other people’s ability to use it), but not excludable (available free of charge)
  • Examples include: clean water, congested roads, fish; biodiversity TRAGEDY OF THE COMMONSThe tendency of any resource that is unowned, and hence, non- excludable, to be overused and under-maintained
  • Imagine being a country, and having a certain area of land where livestock can be raised
  • Our consumption of this land is rival, but non-excludable
  • We are individually incentivised to raise more and more livestock
  • Privately profitable but socially damaging as the grazing land is overused CLUB/ARTIFICIALLY SCARCE GOODSThey often tend to exhibit characteristics of natural monopoliesAn industry is a natural monopoly when a single firm can supply a good or service to an entire market at a lower cost than two or more firmsEmerge when there are economies of scale over the relevant range of output
  • Examples include: water distribution, internet and telephone networks, utilities, rail networks; tolled bridges

REGULATION

 Forcing car drivers to buy car insurance means that the demand for car insurance becomes a vertical line at a socially optimal output level of OB ADVANTAGES AND DISADVANTAGES OF GOVERNMENT INTERVENTION ADVANTAGES DISADVANTAGES DIRECT PROVISION  Direct control of supply and demand  Inefficiency in production: no incentives to minimise costs  Might lead to inefficient mix of goods SUBSIDIES  Can assist the poor  Decisions about the level of subsidies can be captured by the producers

  • E.g. CAP in the EU  Use of taxpayers’ money REGULATION  No need for use of taxpayers’ money  Can burden the poor  Regulations can be ignored