Topic 9:
Government & Environment
A. Government Role: Law and Order
B. Government Role: Income
Redistribution
C. Government Role: Market Failure
D. Market Failure Example:
Environmental Economics
A. Government Role – Law
and Order
Modern economies only operate and grow if
PROPERTY RIGHTS are guaranteed:
People need to be able to own property
People need to be able to earn income to
purchase property, and be able to sell property
Property ownership needs to be guaranteed
from external threats
A. Law and Order
If NOTHING ELSE, the government is
responsible to ensure Property Rights through:
1) A legal system
 Allowing for ownership of property, buying and
selling
 To enforce these laws with appropriate
punishments
2) A police force
 To protect property ownership and support the
legal system
A. Law and Order
3) A military
To protect local property owners from outside
interference
Even if the economy runs “perfectly”, a
government is still needed.
B. Government Role – Income
Redistribution
Governments are often required to balance
EFFICIENCY and EQUITY
Efficiency – society’s resources are used to
produce the maximum amount of goods (that
people want)
Equity – society’s output is divided “fairly”
Fairly could be interpreted as:
a) Equally
b) According to need
c) According to effort
B. Income Redistribution
Governments have a variety of programs that
seek to enhance equity (often at the cost of
efficiency):
Unemployment Insurance
GST credit, Child Tax Benefit, and other
Welfare Programs
Pensions
Subsidized Healthcare
Subsidized Educations
And others…
B. Income Redistribution
Although income redistribution often reduces
efficiency, it benefits society for a variety of
reasons:
1) Insurance
 Many of these programs act as large-scale
income insurance
 Premiums (taxes) are paid now
 Benefits are paid out if your income drops (due to
unemployment, illness, triplets, failed retirement
investments, etc.
B. Income Redistribution
2) Altruism
People feel good when they help others who
need help
It is costly and difficult to identify those who
need help and give the help they need
The government can often offer help on a larger
scale and more efficiently than individuals
B. Income Redistribution
3) Fairness
Many people value fairness
Everyone should be on an equal playing field
It is simple chance if someone is born into a rich
family or a poor family; if someone develops
diabetes; if one of two identical workers lose their
jobs
Income redistribution aims to enhance fairness
B. Income Redistribution
4) Social Stability
High income differences lead to social
instability, causing inefficiency and (in extreme
cases) revolution
The poor resent the rich, and have an incentive to
be less productive or destructive to achieve
“fairness”
The rich fear the angry poor, and (mis)allocate
resources to security and policing
C. Government Role –
Market Failure
IF
A market is a perfectly competitive
(in buyers and sellers)
THEN
The market maximizes efficiency
THEREFORE
The government should NOT intervene
C. Market Failure
BUT
Markets are often NOT Perfectly Competitive;
there is often Market Failure:
1) Market Power
2) Public Goods
3) Asymmetric Information
4) Externalities
C.1 Market Power
If a firm has some degree of market power, there
is not perfect competition (ie: Monopolies,
Oligopolies, Monopolistic Competition).
In these cases, government intervention could be
required (topic 5b):
Merger Prevention
False Advertising Prevention
Predatory Pricing Prevention
Bait and Switch Prevention
Price and Output controls, etc.
C.2 Public Goods
A PRIVATE GOOD has two features:
1) Rival – once consumed, another person
cannot consume it
2) Excludable – others can be prevented from
consuming it
Food (ie: pizza or sushi) is a good example of a
private good. Once I eat it, it’s gone and
you’re left hungry.
C.2 Public Goods
A PURE PUBLIC GOOD has two features:
1) Nonrival – once provided, another person
can consume it at no additional cost
2) Nonexcludable – once provided, it is
impossible or highly expensive to prevent
anyone from consuming it
C.2 Public Goods
National Defense is a good example of a pure
public good:
1) Nonrival – all Canadians benefit
2) Nonexcludable – it’s impossible to prevent a
Canadian from benefitting
Other examples: Conventional Radio, A
Beautiful View, A Canada-Wide Sunglass
dome designed to block harmful sun rays
(Canadome)
C.2 Public Goods
An IMPURE PUBLIC GOOD is either:
1) Nonrival – (examples – a public pool, a
gated national park, an art gallery)
or
2) Nonexcludable – (examples: fish in a lake,
wildlife, my office hours)
To some extent
C.2 Public Goods
Pure Public Goods (and many Impure Public
Goods) should be provided by the
government through:
a) Government production
b) Government provision (and private
production)
Due to:
a) Scale constraints
b) The Free Rider Problem
C.2 Public Goods – Scale
Constraints
Many public goods are large projects that would
require too many individuals to work
together to produce.
(examples: Rocky Mountain National Park,
TransCanada highway)
 The government has the size required to pool
resources for these projects
C.2 Public Goods – Free Rider
Problem
If a public good is provided privately, its
efficiency depend on how people represent
their willingness to pay
-For private goods, people have no incentive to
misrepresent their willingness to pay
-if the price is $10, and that lies in their
willingness to pay, they will pay the $10,
consume the good and be happy
C.2 Public Goods – Free Rider
Problem
-For public goods, people have an incentive to
misrepresent their willingness to pay
-if the price is $10, a person could:
a) hope someone else pays the price, then
they get to enjoy it
b) Claim their willingness to pay is lower (ie:
$2), then enjoy it when others pay the
difference
=>they are a FREE RIDER
C.2 Free Rider Examples
1) At an alligator reserve, people can pay
money to throw meat into the water to feed
the alligators. Many people wait for
someone else to buy and throw the meat.
2) If a community shares a park, residents may
wait for someone else to mow the lawn/pick
up waste before they use it.
3) Your roommate may claim (s)he’s not
interested in cable TV/Pizza, then after you
buy it they watch/eat.
C.2 Public Goods – Free Rider
Problem
When the government provides Public Goods:
1) Everyone is taxed (forced to pay)
2) Everyone can benefit
The free rider problem is avoided.
Efficient Provision of PUBLIC GOODS
-Consider Maka and Susan’s individual
demands for a public good: Youtube
-Youtube shows are nonrival and
nonexcludable; one person’s
consumption doesn’t affect anothers’
-The key difference in a public good is that
BOTH can consume a purchased good;
it is not used up
-This results in a VERTICAL SUMMATION
to calculate willingness to pay
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Market demand
P
Maka
Susan
P
10
P
11
7
4
2
Q
2
Q
Q
2
Maka is willing to pay $4 each for 2 youtube
shows, and Susan is willing to pay $7 each,
therefore the market is willing to pay $11 each
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Market demand
P
Maka
Susan
P
10
7
4
4
2
2 3
Q
P
11
S
6
2 3
Q
Q
3
The market Supply gives an equilibrium quantity
of 3. Here price paid in the market ($6) is the sum
of Maka’s payment ($2) and Susan’s payment ($4).
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Efficient Provision of Public Goods
MC  MB
PersonA
 MB
PersonB
 Public goods should therefore be
provided until the point where the
marginal cost of the good is equal to the
sum of marginal benefits
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