Introduction to Microeconomics
Chapter 14
Public Goods
Excludability and Rivalry in
Consumption (Part I)
Public good
a good or service that is both:
• Non-excludable: non-payers can not be excluded from using it.
• Non-rival: each unit consumed by one does not its availability for
others.
Collective good
a good or service that, to at least some degree, is non-rival
but excludable.
Private good
a good for which non-payers can easily be excluded and for
which each unit consumed by one person means one fewer
unit is available for others.
Commons good
a good for which non-payers cannot easily be excluded and
for which each unit consumed by one person means one
fewer unit is available for others.
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-2 Based on Rivalry and Excludability
LO1: Types ofCh14
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Market Failure
• Market failure drives the economic rationale
for intervention
– Occurs when “perfect competition” assumptions fail
– Intervention is a benefit cost exercise – the benefits (reduction in social cost)
must exceed the cost of intervention
– Benefits include reduction in social costs, increased fairness in market
outcomes, and increased output
– Costs of intervention include crowding out, disincentive effects of
tax/financing burden, social/political costs…
• Main “perfect competition” assumptions:
–
–
–
–
Costless transactions
Perfect information
Many buyers and sellers
Goods and services “excludable” and “rivalrous”
Preliminary results - For discussion only
3
Externalities
• Occur when excludability assumption does not hold
My activity (production or consumption) affects a second party
Externalities can be positive or negative
• Positive externalities: benefits for third parties, underprovided by
the marketplace (e.g., food safety systems such as HACCP can
reduce incidence of food-borne disease, but producers may underinvest, especially if they perceive no consequences)
• Negative externalities: costs for third parties, overprovided by the
marketplace (e.g., pollution control results in increased costs which
may be easily shifted to other producers/consumers)
Preliminary results - For discussion only
4
Public Goods
• Occur when excludability and rivalry do not hold
Table 1: Levels of excludability and rivalry
Excludable
Non-excludable
Rivalrous
Non-rivalrous
Private goods
(wheat, canola, most physical output
sold by farmers and processors)
Club goods
(private parks)
Common-pool resources
(national fisheries or forests)
Pure public goods
(air quality, aesthetic value of landscape,
biodiversity, agricultural research, and
commercialization)
Preliminary results - For discussion only
5
Pure Public Goods
• Two reasons favour government provision of
public goods.
– A private business providing such goods could not
collect any payment for costs.
• “Free-rider” – will let others pay and consume anyway.
– Economic surplus issue:
• Since non-rival good means the marginal cost of serving
additional users = zero, it would be inefficient to charge
those users, even if charging a price were possible.
• The only public goods the government should
even consider providing are those whose
benefits exceed their costs.
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Why does government exist?
Market failure - regulatory response typical
Example: consumer education, fair lending laws, securities
regulation...
Externalities
Example: encourage government to supplement private sector
provision of a good or services subsidization of vaccines, public
education) and
Example: suppression of a bad (pollution).
Distributional fairness
Example: Laws regarding usury, anti-discrimination legislation
Example: Public housing
Example: Poverty reduction such as the national child benefit,
progressive tax, GST rebate for lower income households
Government provided goods and services
Pure Public
Goods
Public
Goods
Market Failure
Defence, public health, external trade,
education, transportation infrastructure
Risk
management
Subsidies to basic research, northern
geo-science mapping
Information
failures
Moral hazard, asymmetric information,
time myopia..
External effects
Pollution control, subsidies to education,
compulsory vaccination...
Decreasing Cost
Regulation (price, profits, revenues..),
nationalization
Market
Manipulation
Prosecution, fines, incarceration ...
Monopoly
Merit
Goods
Definition of government initiatives
•
•
Social marketing to promote a goal (articulation of goal or intent;
guidance on preferred behaviour)
Expenditures on goods and services
 Direct resource commitments on goods (public housing,
vaccination)
 Direct resource commitments on services (consumer information,
training)
 Tax expenditures (tax deductions and credits awarded to citizens
and businesses to behave, spend, invest, etc.)
 Grants/contributions/contracts to third parties to perform services
•
•
Legislation is a general framework for how citizens conduct
themselves (smoking bans, criminal code) and requires political
assent.
Regulation modifies elements of legislation (changes to the speed
limit) and can be completed by administrative fiat.
Information Failure
• Moral hazard
– Market participants alter their behaviour in response to
the divergence of public and private costs
– Taxes/subsidies cause market participants to
purchase/sell less/more than would have occurred with
prices equal to the marginal cost
• Asymmetry of information
– Sellers are typically more informed than buyers
– Prisoners paradox - information lack produces suboptimal outcomes
• Uncertainty about other players reactions causes poor
decisions
– Nash equilibrium exists when I account for your
probable reaction to my choices. Equilibrium exists
when we have all adjusted and readjusted to each
others choices/decisions.
Government provided goods and services
Public
Goods
Merit
Goods
Quality of Life
Support for arts ,recreational sports, community
centres, ethno cultural support...
Nationalism
Support for elite arts and sports,...
Redistribution
Progressive income tax, National
Child Benefit, GST rebate...
Safety Net
Social assistance, employment
insurance, farm safety nets,
workers’ compensation...
Equity, Fairness
National Child Benefit (NCB)
The NCB Initiative is a joint initiative of federal and
provincial/territorial governments intended to help
prevent and reduce the depth of child poverty, as
well as promote attachment to the workforce by
ensuring that families will always be better off as a
result of working.
It does this through a cash benefit paid to low
income families with children, a social assistance
offset, and various supplementary programs
provided by provinces and territories.
National Child Benefit
(two children < 18)
NCB is a top-up for families
with low-mid incomes
Benefit Payment
$6000
CCTB – Base benefit (tax free) that
extends to a fairly high income
(~$100,000) depending on the
number of children under 18
$26,000
$33,000
All numbers approximate
© Greg Mason, 2012 & PRA Inc.
$100,000
Net Family Income
13
Paying for Public Goods
• Public provision and public production are
different issues, because government can and
often does sub-contract parts of production.
Example:
• The military often subcontracts aircraft or building
maintenance to private firms.
• Canada’s health care system is a public payer with a mix of
public and private suppliers
• If cost collection from individual users is
infeasible, covering the costs of provision means
taxation is unavoidable.
Ch14 -14 Pays for Public Goods
LO2: How Government
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Types of Taxes: Definitions
Head tax
same amount for every taxpayer.
Regressive tax
proportion of income paid in taxes declines as
income rises.
Proportional income tax
all taxpayers pay same % of their incomes in taxes.
Progressive tax
% of income paid in taxes rises as income rises.
LO2: How Government Pays
for Public Goods
Ch14 -15
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Demand for Private vs. Public Goods
Demand for Private goods
Different individuals are free to consume whatever
quantity and quality they choose to buy.
Total Demand Curve.
The amount each person would buy, at a given price, added
up over all persons. It is the individual demands summed
horizontally.
Demand for Public goods
Jointly consumed goods must be provided in the same
quantity and quality for all persons.
Total Demand Curve.
The amount each person consumes, added up over all
persons, given that amount of public good is produced. It is
the individual demands summed vertically.
LO3: The Optimal Quantity
of a Public Good
Ch14 -16
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D1
+
24
Q1
(a)
24
9
+
=
D1
36
Q2
(b)
Price ($/unit)
18
Price ($/unit)
Price ($/unit)
FIGURE 14.1: Generating the Market Demand Curve for
a Private Good
24
D = D1 + D2
9
=
60
Q = Q1 + Q2
(c)
– To construct the market demand curve for a
private good [panel (c)], we add the individual
demand curves [panels (a) and (b)] horizontally.
LO3: The Optimal Quantity
of a Public Good
Ch14 -17
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FIGURE 14.2: Generating the
Demand Curve for a Public
Good
Price
($/unit)
18
9
D1
12
24
36
Q1
(a)
Price
($/unit)
•
To construct the demand curve
for a public good [panel (c)], we
add the individual demand
curves [panels (a) and (b)]
vertically.
24
16
D2
8
12
24
36
Q2
(b)
Price
($/unit)
42
25
D = D1 + D2
8
12
24
36
Q
(c)
LO3: The Optimal Quantity
of a Public Good
Ch14 -18
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FIGURE 14.3: The Optimal Quantity of Parkland
Marginal
cost
200
140
80
Demand
A0
A*
The optimal number of hectares of urban parkland is A*, the quantity at which
the public’s willingness to pay for additional parkland is equal to the marginal
cost of parkland.
LO3: The Optimal Quantity
of a Public Good
Ch14 -19
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The Loss in Surplus from a Pay-per-View Fee
Twice as many households would watch the program if its
price were zero instead of $10. The additional economic
surplus is the area of the blue triangle, or $50 million.
LO3: The Optimal Quantity
of a Public Good
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Rent-seeking
• Rent-seeking is an attempt to gain economic advantage throuhg social or
political manipulation as opposed to creating a selling something unique
• Licensing of doctors and other professions is a typical example as is supply
management cur, rather than by creating new wealt
• Advocates of these privileges argue that they ensure quality and prevent
chests from preying on the public. The license is promoted as an indicator
of quality and reduces the time needed to investigate the qualifications of
the supplier.
• Rent seeking is often seen by lobbying to capture privileges stemming
from government regulation or potential subsidization.
LO4: Rent Seeking and Total
Economic Surplus
Ch14 -21
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•
Polaris Institute, shows key companies and associations of the energy industry
met frequently with politicians and senior bureaucrats in recent years to craft
common messages and discuss regulatory changes.
•
The report shows that in just one year to this September, senior industry officials
held 791 separate meetings with ministers, members of Parliament and officials
even as the federal government was pursuing major regulatory changes that critics
claim amount to a gutting of environmental protection.
Mr. McCarthy noted that over the course of that one year, some 52 of those
sessions were with members of cabinet,
The most frequent visitors to the government were from the Canadian Association
of Petroleum Producers, TransCanada Corp., Imperial Oil Ltd.; the Canadian
Energy Pipelines Association, Suncor Energy Corp. and Enbridge Inc.
•
•
•
•
Mr. McCarthy said the energy industry's apparent widespread engagement with
government provides ammunition for critics who accuse the government of
favouring the resource sector at the expense of the environment. Report coauthor Richard Girard said, "To us, this shows a fundamental shift in our
democracy from government working for the people to government working for
private interests such as industry”(Globe and Mail, B1, 04 December 2012)
•
Who is the Polaris Institute?
•
http://www.polarisinstitute.org/
14.5 Local, Provincial, or Federal?
Local, Provincial, or Federal
Government?
• Unitary system of Government.
– Central government can delegate at will to local
authorities, but retains control.
• Federalism.
– Constitution establishes the jurisdiction and powers
of each level of government – negotiation and
agreement is necessary for any change.
• Under the Canadian Constitution - Provincial and Federal
governments must share power.
• Common around the world: e.g. USA, Germany, Australia.
– Problem: Temptation for politicians - blame other
levels of government for all problems.
© 2012 McGraw-Hill
Ch14
-24Provincial or National Governments
LO5: Roles of
Local,
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Local vs. Federal Government
• Local government.
– A closer match between local preferences and local public
policies.
• Federal government.
– Economies of scale in some government services imply cost
savings to centralization.
• Provinces spend more than federal government, since
1970s.
– Education and health are the major costs – have been
increasing.
• Federal government has larger tax base.
– All federations have inter-governmental transfers of tax revenue
to maintain equity and economic surplus within the federation.
© 2012 McGraw-Hill
Ch14
-25Provincial or National Governments
LO5: Roles of
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Chapter Summary
• Public goods are, in varying degrees, non-rival and nonexcludable.
• Non-rival describes goods for which one person’s
consumption does not diminish the amount available
for others.
• Non-excludable refers to the difficulty of preventing
non-payers from consuming certain goods.
• A collective good - such as pay-per-view cable television
- is non-rival but excludable. Commons goods are goods
that are rival but non-excludable.
• The economic criterion for providing the optimal
quantity or quality of a public good is to keep increasing
quantity or quality as long as the marginal benefit of
doing so exceeds the marginal cost.
Chapter Summary
Ch14 -26
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Chapter Summary
• One disadvantage of exclusive reliance on government for public
goods provision is the element of coercion inherent in the tax
system.
• Some public goods are provided through private channels, with the
necessary funding provided by donations, sale of by-products, by
development of new means to exclude non-payers.
• Government serves two other important roles: the regulation of
activities that generate externalities and the definition and
enforcement of property federal system rights.
• Canada has a of government and a constitution that establishes the
jurisdiction and the powers of both the federal and provincial levels
of government.
Chapter Summary
Ch14 -27
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