Non-Market Economics
Outside the Market
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We have studied how consumers and
firms behave in market situations: as
buyers and sellers; as demanders and
suppliers.
There is activity that occurs outside of
market situations. Sometimes this
activity is referred to as Market Failure
Market “Failures”
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1. The Market might fail to provide
certain desired goods and services
2. The Market might fail to reflect costs
and benefits in the market price
3. Society might prefer a different result
than the market determines
Public vs. Private Goods
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A public good is a good that is available
for everyone to consume, regardless of
who pays and who doesn’t
A private good is consumed by a single
person or household.
Definitions
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Public goods are:
1. “non-rival”:
available to
everyone to use
2. “non-exclusive”:
can’t prevent “nonpayers” from
consuming
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Private goods are;
1. “rival”: only one
person can use the
good
2. “exclusive”: nonpayers can be kept
from consuming the
good
Public Goods and the Market

Private companies in Alexandria, VA
put out fires only of homes of those
who paid for protection. A plaque
was displayed by those who had
paid for the protection.
Public Goods
Public goods are seldom provided by the
modern market, since the chance for
earning a profit is greatly limited
Governments generally provide public
goods
Examples of Public Goods
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Public Schools
Public radio
Freeways – Interstate Highways
Free music concert
Internet
National Defense
Why provide public goods?
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Why do we have public schools?
Because many groups benefit beyond
the cost of providing public education:
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Business prefers educated workers
Educated individuals earn higher incomes
Government collects more taxes from
workers with higher incomes
Free-rider
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A “free-rider” is a person who gets the
benefits of a public good without paying
for it.
Studies show that only 25% of public
radio listeners actually contribute. How
many of you listen to 89.7 the River?
How many contributed to the fund
raiser?
How to fund public goods?

Voluntary contributions would probably
not pay for public goods like education
and defense because of the free-rider
problem:
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1. Why pay when you can enjoy the public
good for free?
2. Why pay for something you won’t use?
Taxes

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Instead of voluntary contributions, we
have given government the power to
collect taxes to pay for public goods.
Oliver Wendell Holmes said, “Taxes are
the price we pay for a civilized society.”
Public Choice Theories
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Some feel that government is the best
tool to intervene in the economy
Others oppose government intervention
in the economy
Arguments in favor of Gov’t
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Politicians must avoid extreme positions
to appeal to the “median voter”
Voters can “vote with their feet” and
move to communities that reflect their
preferences on spending and taxes
Arguments against Gov’t
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Self Interest:
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1. Voters – are ill-informed. Being an
informed voter takes time, effort and
money.
2. Politicians – Don’t keep promises, are
only concerned with getting reelected
3. Bureaucrats – are only interested in
keeping their jobs.
Arguments against Gov’t
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Small special interest groups can
manipulate government to their benefit
When benefits are concentrated for only
a few there is an incentive to spread
the costs among many.
To achieve this end, special interests
use lobbyists to express views
Spillover or Externalities
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The costs or benefits of some goods are
not limited to just the producers and
consumers involved in the market for
these goods, they “spillover” to others.
Since the costs or benefits aren’t
included in the market price, they are
referred to as external costs or benefits
External benefits
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Flowers and flowering trees, that the
middle school librarian enjoys as she
drives past my house.
Outside of the price determined by
supply and demand
External Costs
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Costs that are outside of the price
determined by supply and demand.
Examples might include pollution, noise
pollution.
Correct for Market failures
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Government could intervene.
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Establish fines for pollution
Tax polluters
Legal Action to sue polluters for damages
Set up regulations
Create pollution permits
These steps INTERNALIZE the external costs,
making them show up in the supply and
demand graph.
Complete Concrete in Elkhorn
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An example of government intervention
External benefits
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Pass a law, and make violators pay a
fine.
Or we could subsidize, help pay for the
desired product.
Without Government Action
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Coase theorem
In cases of clear property ownership, a
few individuals might be able to
“internalize external costs”
The weedy lawn
The cows and wheat.
Income Distribution
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In our market society, income is not
distributed equally among households.
Is this inequality acceptable? What if
anything should we do about it?
Quartile Income Distribution
%
‘79
‘81
‘83
‘85
‘87
‘89
‘91
‘93
‘97
2004
20
4.2
4.1
4.0
3.9
3.8
3.9
3.8
3.5
3.6
3.4
20
10.2 10.3 10.0 9.9
9.8
9.4
9.5
9.1
8.9
8.7
20
17.2 16.5 16.6 16.1 15.7
20
24.3 24.9 24.4 24.5 24.6 23.7 24.2 23.7 23.0 23.0
20
44.1 44.3 45.1 45.6 46.1 46.8 46.5 48.6 49.3 50.0
16.1 16.0 15.1 15.1 14.8
Lorenz Curve
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The Lorenz Curve illustrates the
inequitable distribution of income
See the graph on the board
Poverty
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This unequal distribution leaves a portion
of the population in poverty
Poverty for a household is defined by an
income below a “poverty budget”
A poverty budget is based on a minimum
food budget X 3.
In 1999 an income below $17,029 for a
family of four was considered poor
2006 HHS Poverty
Guidelines
Persons in Family
 1 $ 9,800
 2 $ 13,200
 3 $ 16,600
 4 $ 20,000
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5 $ 23,400
6 $ 26,800
7 $ 30,200
8 $ 33,600
For each additional
person, add $3,400
Inadequate Education
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Percentage of
households with
college degrees in
poverty:
2.4%
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Percentage of
households without
a high school
diploma in poverty:
24.1%
Education and Income
Gender Discrimination
Racial Discrimination
Single parent
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Two parent families in poverty: 4.8%
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Single parent families in poverty: 27.8%
Solutions
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Welfare Reform?
Income Redistribution
Education
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Affirmative Action vs. “Legacies”
Zero Sum Society
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In any policy decision there are winners
and losers, just like a poker game
It is important to ask “Who are the
winners and who are the losers?”
Cost Benefit Analysis
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Costs < Benefits
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Costs > Benefits
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Make the choice
Don’t make the choice
Basketball officials
Vacation Speeding