Topic 3.3 Public Goods

3.3 Providing Public Goods

Objectives
1. Analyze market failures.
2. Identify examples of public goods.
3. Evaluate how the government allocates some resources by managing externalities.

If the government did not build roads, who would? If you wanted a road built in front of your house, would you build it? Would you allow your neighbors to use it? Would they have to pay you?

Market Failure – A situation in which the market does not distribute resources efficiently.

The government decides to intervene when the market fails if the benefits outweigh the negatives.

Public Good – A shared good or service for which it would be impractical to make consumers pay individually and to exclude non-payers.

EX: Dams, Parks.

For the most part, any number of consumers can use a public good without reducing the benefits to any single consumer.
EX: People driving next to you don’t diminish your ability to use a road.

To determine whether something is produced as a public good one must look at the costs and benefits. When a good or service is public…
1. The benefit to each individual is less than the cost that each would have to pay if it were provided privately.
2. The total benefits to society are greater than the total cost.
In these cases the government provides the good, or else it wouldn’t get done.

Public Sector – The part of the economy that involves the transactions of the government

Private Sector – The part of the economy that involves transactions or individuals and businesses.

Free-rider – Some who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it were provided as a public good.

EX: People who don’t pay taxes or are illegal immigrants benefit from military protection.

Externalities

Externality – An economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume.

Externalities are split into two categories: positives and negative externalities.

Public goods generate benefits for many people, even those who do not pay. Such beneficial side effects are called positive externalities.

• Examples: A new neighbor moves in next-door to you into an old rundown house. She paints it, cuts the grass and plants a garden; everyone in your neighborhood benefits from the beautiful new house.

• A computer company has an outreach program that trains underprivileged youth to be computer programmers. These teens will then go out and be hired by other companies who will benefit from the skills the already have.

Some decisions produce goods and services that generate unintended costs, called negative externalities.

• Examples: A sawmill pollutes a river that flows past a nearby town. The town has to clean up the pollution and deal with its consequences.

• Your neighbor has late night polka parties, which keep you awake. Plus, you hate polka music.

The government’s goal is to increase positive externalities, like education, and decrease negative externalities, like pollution.