public goods and issues sfls

Providing Goods and some Problems

part 2

So far we have mostly talked issues related to these type of goods

We will talk more about this one in a very long time later

Private goods

Common Resource

Natural Monopolie

Public goods

Excludable Nonexcludable

Nonrival

Good Types…a little more detail

But now I want to focus on these types

Private goods

Common Resource

Natural Monopolie

Public goods

Nonrival

Classifying Goods and some Problems:1.) Classification and Good

Types3.) Problems of the Non-Excludables2.) Providing Public Goods

Public goods are in theory unlimited, so it’s hard to put a price on them so markets don’t provide these as much.

Private goods

Common Resource

Natural Monopolie

Public goods

Nonrival

Public goods

Why Markets don’t do a good job with these types:

The good is not produced in the market, even if buyers collectively value the good higher than the cost of providing it. Public Goods have these qualities and therefore governments often have to produce them.

Goods that are Non-excludable

-You can’t stop someone else from using it, so you can’t make money off of it and thus are free to use.

Goods that are Non-rivals

- Since there is an infinite supply of these, it is difficult to control and a market with very few suppliers seems “natural”

Result:

-A person who enjoys the benefits of a good or service without paying for it.

Because of the free-rider problem, the market would provide too small a quantity of a public good.

To produce the efficient quantity, government action is required.

Public Goods –The problem that some don’t pay

Free Rider

No individual has an incentive 激励 to pay for providing the efficient quantity of a public good because each individual’s marginal benefit is less than the marginal social benefit.(MPB < MSB)- Someone has to pay for them, but everyone gets to use them.

This is a primary justification for the existence of government. 一个主要的原因有政府- The decision to make public goods is a cost/benefit analysis. (as well as other factors, such as politics.)

Providing Public Goods

Providing Public GoodsQuestions to understand:

1.) How do you get people to pay for these goods then? 2.) How much Public Goods should be

produced?3.) What problems happen with producing Public goods?

1.) How do you get people to pay for these goods then? 2.) How much public goods should be

produced?3.) What problems happen with producing Public goods?

Where the money comes to pay for public goods

Introduction to Taxes:3.) Efficacy and Fairness of Taxes

Three ways to view types of Taxes:I. Proportional Tax

II. Progressive TaxIII. Regressive Tax

How do you get people to pay for these goods then?

And add all the issues about it.

Two principles:

Equity vs. Efficiency 公平与效率

Efficacy and Fairness of Taxes

2.) Ability to Pay Principle:

1.) Benefits Principle:

Those with greater ability to pay a tax should pay more tax.

Those who benefit from public spending should bear the burden of the tax that pays for that spending.

Who should pay for those public goods?

produced?3.) What problems happen with producing public goods?

Cost-Benefit Analysis (CBA)

Providing Public Goods How much Public Goods should be produced?

- a study that compares the costs and benefits of providing a public good.

- If the benefit of a public good exceeds or equals the cost of providing it, government should provide the good and pay for it with a tax if the private market doesn’t provide enough of it.

Means an additional one, the measurement from one unit to the next. 最后的东西之一

Marginal Benefits VS. Marginal Costs 边际效益针对边际成本 (MB) (MC)

If MB > MC = It is worth doing 这是值得的If MB = MC = It may be worth doing “a wash” 收支平衡If MB < MC = Not worth doing 这是不值得的

Also called Cost/Benefit analysis

Marginal Thinking

Remember this?

Marginal Social Benefits VS. Marginal Social Costs 边际效益针对边际成本 (MB) (MC)

If MSB > MSC = It is worth doing 这是值得的If MSB = MSC = It may be worth doing “a wash” 收支平衡If MSB < MSC = Not worth doing 这是不值得的

Marginal Thinking

Just apply it to society as a whole.

The benefit a public good provides is the value of its services.

Because security lights in a common parking area are non-rival and non-excludable, they are a public good.Everyone consumes the same quantity of them.

To find the economy-wide value of the security lights, we add together the marginal benefits of everyone who benefits from them.

Marginal Social Benefit (MSB) of a Public Good

Providing Public GoodsExample with street lights:

How many lamp posts to make?

Find each person’s marginal benefit

Q 1 2 3 4 5 6

70 60 50 40 30 20 10

Q 1 2 3 4 5 6

70 60 50 40 30 20 10

Q 1 2 3 4 5 6

70 60 50 40 30 20 10

Q 1 2 3 4 5 6

70 60 50 40 30 20 10

Q 1 2 3 4 5 6

70 60 50 40 30 20 10

MBMBMB

Add them all up to equal MSB

Q 1 2 3 4 5 6

250 200 175 150 125 100 75

Q 1 2 3 4 5 6

250 200 175 150 125 100 75

Notice the vertical axis numbers have increased to show

that this single line is all four lines combined

MSB & MSC

Q 1 2 3 4 5 6

250 200 175 150 125 100 75

MSC = MSB

MSC = MSB = efficient amount of public goods to make

The Efficient Quantity of a Public Good?

If MSB (MB) = MC, resources are used efficiently.

If MC < MSB, resources can be used more efficiently by increasing the quantity produced.

If MC > MSB, resources can be used more efficiently by decreasing the quantity produced.

Private goods Public goods

So it’s the same idea, just add “society”

produced?3.) What problems happen with producing public goods?

Cost Benefit Analysis

How much is a life worth?

Exactly how many police SHOULD there be? And how

will they be paid for?

How much is a life worth?Is it worth the marginal

cost to have more firetrucks purchased by

the government?

- CBA are imprecise, 不精确 so the efficient provision of public goods is more difficult than that of private goods.

Problem:

- Measuring the benefit is usually difficult and with the free rider issue.

What problems happen with producing public goods?

Providing Public GoodsWhat problems happen with producing public goods?

Asymmetric Information

- Buyers and sellers don’t have equal information. One has more then the other and can cheat the other.非对称信息

非对称信息If one side knows more then the other side they can cheat

Moral Hazard

- People who have asymmetric information, and the accuracy of the information they have cannot be monitored 监控 or challenged 挑战 , so they have an incentive to behave differently.

Who will police the police?

Moral HazardHow many is

enough?

If it is your government job to make bridges, would you ever

say, “Ok we have enough bridges now, I don’t need that job

anymore.

Check out China’s Ghost towns.

Moral HazardWho will police

the police?If you rent a car and you don’t

own it.

the police?

Insurance 保险And you didn’t have to pay for anything if the car has a

problem…

Moral Hazard

Would you treat it the same as if you owned it and was personally

responsible?

the police?

非对称信息

Is it ok to be ignorant? 无知

Asymmetric Information Moral Hazard

Rational Ignorance理性无知

- The decision not to acquire information because the marginal cost of doing so exceeds the marginal benefit.

Why Government Is Large?

Part of the reason why government is large is Inefficient overprovision of public goodsPeoples’ rational ignorance

Once a bureaucracy 官僚 gets established 既定 , its goal of budget maximization combined with people’s rational ignorance explains why government takes a large proportion of total income.

Classifying Goods and some Problems:1.) Classification and Good

Types3.) Problems of the Non-Excludables2.) Providing Public Goods

Different kinds of goods with different problems

For both Public Goods and Common Resources, Externalities happen because something of value has no price attached to it.

So, private decisions about consumption and production can lead to an inefficient 低效 outcome.

Problems of the Non-Excludables

The good is not produced in the market, even if buyers collectively value the good higher than the cost of providing it. Public Goods have these qualities and therefore governments often have to produce them.

- Since there is an infinite supply of these, it is difficult to control and a market with very few suppliers seems “natural”

Result:

Free Rider

- CBA are imprecise, 不精确 so the efficient provision of public goods is more difficult than that of private goods.

Problem:

- Measuring the benefit is usually difficult and with the free rider issue.

What problems happen with producing public goods?

the police?

非对称信息

Common resources have the biggest problem of them all

Private goods

Common Resource

Natural Monopolie

Public goods

Nonrival

- Since there is a limited supply of these, once they are gone there is no more.

You can’t stop me from consuming the good, and more consumption by me means less of the good available for you.

Result:

- occurs when a user depletes the amount of the common resource available to others but does not take this cost into account when deciding how much to use the common resource.

Common Resources –The Tragic Overuse Problem

Overuse

In simpler words:

Your using too damn much stuff!!!

Go watch this movie called “The Lorax” it’s

a famous Dr. Seuss children’s book that show the main idea that is the problem.

Common Resources –The Tragic Overuse ProblemOveruse

Tragedy of the Commons公地悲剧

- It is the absence of incentives to prevent the overuse and depletion of a commonly owned resource.

In the case of a common resource, the marginal social cost of my use of that resource is higher than my individual marginal cost

Common resources left to the free market suffer from overuse.

***sustainable - 可持续发展

Examples – through the earth

Suppose we have three privately owned farms and this upper right

corner is owned by no one.

An example…

And each of these farmers have lots of

sheep.

Now, these sheep eat grass. The sheep can eat the grass on the farm owned by the

farmer…

They could eat the grass on this empty

land that no one owns. (It’s a free

Common Resource!)

What do you think would happen if all the farmers

decide to take advantage of this?

And what do you think would happen to the land itself?

Land goes to hell right? And in the long run?

All that is left is what the farmers started with the common resource totally

destroyed.

Amount

Sustainability

Tragedy of the Commons 公地悲剧 Sheep Grazing land

Maximum sustainable amount

Sustainability 可持续发展

Private goods = limited and to make them you need common resources

Private goods

Common Resource

Natural Monopolie

Public goods

Nonrival

Public goods = unlimited and to make them you need common resources Natural Monopolies = unlimited and to make them you need common resources

Result: One big f@%ked up mess that has been passed down to you and it’s your turn to deal with it.

Tragedy of the Commons 公地悲剧 Problems of the Non-Excludables

So to summarize...

Private Goods

Common Resource

Natural Monopolies

Public Goods

Classification and Good Types

Excludable Non-Excludable

Non-Rival

Providing Public Goods How much Public Goods should be produced?

Marginal Benefits VS. Marginal Costs 边际效益针对边际成本 (MB) (MC)

If MB > MC = It is worth doing 这是值得的If MB = MC = It may be worth doing “a wash” 收支平衡If MB < MC = Not worth doing 这是不值得的

Marginal Thinking

Marginal Social Benefits VS. Marginal Social Costs 边际效益针对边际成本 (MB) (MC)

If MSB > MSC = It is worth doing 这是值得的If MSB = MSC = It may be worth doing “a wash” 收支平衡If MSB < MSC = Not worth doing 这是不值得的

Marginal Thinking

Free Rider

the police?

非对称信息

Common Resources –The Tragic Overuse ProblemOveruse

Tragedy of the Commons公地悲剧

- It is the absence of incentives to prevent the overuse and depletion of a commonly owned resource.

In the case of a common resource, the marginal social cost of my use of that resource is higher than my individual marginal cost

Common resources left to the free market suffer from overuse.

***sustainable - 可持续发展

The end of part 2 Thanks

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