Download O`Sullivan Sheffrin Peres 6e

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
1 of 20
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
2 of 20
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
6/e.
O’Sullivan, Sheffrin, Perez
Microeconomics: Principles, Applications, and Tools
Public Goods and
Public Choice
Here is the text from a TV newscast
in the year 2070: “Boomer, the 200meter asteroid on a collision path
with the earth, is expected to land at
about 10:00 A.M. in the heart of the
world’s breadbasket, the American
Midwest.
PREPARED BY
FERNANDO QUIJANO, YVONN QUIJANO,
AND XIAO XUAN XU
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
3 of 20
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
APPLYING THE CONCEPTS
1
2
How can we respond to the free-rider problem?
Free Riders and the Three-Clock Tower
What happens when external benefits spill across
international boundaries?
Global Weather Observation
3
What private goods generate external benefits?
External Benefits from LoJack
4
What is the economic logic of the median-voter rule?
Politicians Are Like Ice-Cream Sellers
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
4 of 20
Public Goods and Public Choice
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
 FIGURE 15.1
Spending Programs for
Local, State, and Federal
Governments
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
5 of 20
Public Goods and Public Choice
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
 FIGURE 15.2
Revenue Sources for Local,
State, and Federal
Governments
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
6 of 20
15.1
EXTERNAL BENEFITS
AND PUBLIC GOODS
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
● external benefit
A benefit from a good experienced by someone other
than the person who buys the good.
Public Goods and the Free-Rider Problem
● public good
A good that is available for everyone to consume,
regardless of who pays and who doesn’t; a good that
is nonrival in consumption and nonexcludable.
● private good
A good that is consumed by a single person or
household; a good that is rival in consumption and
excludable.
● free rider
A person who gets the benefit from a good but does
not pay for it.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
7 of 20
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
APPLICATION
1
FREE RIDERS AND THE THREE-CLOCK TOWER
APPLYING THE CONCEPTS #1: How can we respond
to the free-rider problem?
In the days before inexpensive wristwatches, many towns built clock towers to
help their citizens keep track of time.
• Towns paid for the clock towers with voluntary contributions from citizens.
One town built a four-sided tower but put clock faces on only three sides of the tower.
• One of the town’s wealthy citizens refused to contribute money to help build the
clock tower.
• Town officials decided not to put a clock face on the side of the tower facing this
citizen’s house.
Problem:
• Other citizens on the same side of town also suffered from not seeing the clock.
• Preventing a free ride by one citizen caused problems for other citizens.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
8 of 20
15.1
EXTERNAL BENEFITS
AND PUBLIC GOODS
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
Overcoming the Free-Rider Problem
Successful organizations use a number of techniques to encourage people
to contribute:
• Giving contributors private goods such as coffee mugs,
books, musical recordings, and magazine subscriptions.
• Arranging matching contributions.
• Appealing to a person’s sense of civic or moral responsibility.
Asteroid Diversion as a Public Good
The diversion of asteroids is a public good in the sense that it is available for
everyone’s benefit, regardless of who pays and who doesn’t. As with any
public good, the key to developing an asteroid-diversion program is to collect
money to pay for the program.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
9 of 20
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
APPLICATION
2
GLOBAL WEATHER OBSERVATION
APPLYING THE CONCEPTS #2: What happens when
external benefits spill across international borders?
As another example of a public good, consider global weather observation. In this case,
information gathered by one country generates external benefits when it is shared with
other countries.
• Satellites, nomadic buoys, and weather stations monitor weather in different parts
of the world, but no single organization gathers all the information to reveal the big
weather picture.
• Another problem is that the uninhabited parts of the world, in particular the vast
oceans of the southern hemisphere, receive little monitoring.
In recent years, the United States has taken the lead in encouraging cooperation and
the sharing of data collected by different organizations around the world.
According to the National Oceanic and Atmospheric Administration (NOAA), early
warnings of a change in the current in 1997–98 reduced damage to the California
economy by about $1.1 billion.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
10 of 20
15.2
PRIVATE GOODS WITH
EXTERNAL BENEFITS
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
External Benefits from Education
Education generates three sorts of external benefits:
1 Workplace externalities. When a well-educated person joins a work
team, the productivity of everyone on the team increases.
2 Civic externalities. A well-educated person is more likely to vote
intelligently, so there are external benefits for other citizens.
3 Crime externalities. Educated people earn higher legal incomes and
thus commit less crime.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
11 of 20
15.2
PRIVATE GOODS WITH
EXTERNAL BENEFITS
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
External Benefits and the Marginal Principle
 FIGURE 15.3
External Benefits and the
Marginal Principle
Education (represented here as
the number of books read)
generates external benefits, so
the marginal social benefit
exceeds the marginal private
benefit.
Using books as an example of
education, an individual picks
point a, where the marginal
private benefit equals the
marginal cost.
Point b is the socially efficient
point, where the marginal
social benefit equals the
marginal cost.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
12 of 20
15.2
PRIVATE GOODS WITH
EXTERNAL BENEFITS
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
External Benefits and the Marginal Principle
Other Private Goods That Generate External Benefits
The government subsidizes other goods that generate external benefits.
Subsidies for on-the-job training and education encourage workers and firms to
invest in human capital and increase labor productivity. It is sensible for the
government to subsidize training and education because some of the benefits
are transferred to other firms when workers change employers.
Research at universities and other nonprofit organizations provides knowledge
or technology that leads to the development of new products or the
improvement of old ones.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
13 of 20
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
APPLICATION
3
EXTERNAL BENEFITS FROM LOJACK
APPLYING THE CONCEPTS #3: What private goods
generate external benefits?
LoJack is a private good that generates external benefits.
A study by two economists estimated the private and external benefits from
LoJack:
• For every three LoJack systems installed, the number of auto thefts
decreases by one car per year.
• The external benefit from fewer vehicle thefts is
about $1,300 per LoJack per year.
The benefits are experienced by people who don’t buy their own LoJack
systems but who benefit because thieves can never be sure whether a
particular car is protected by LoJack or not.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
14 of 20
15.3
PUBLIC CHOICE
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
● public-choice economics
A field of economics that uses models
of rational choice to explore decision
making in the public sector.
Voting and the Median-Voter Rule
● median-voter rule
The choices made by the government
will match the preferences of the
median voter.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
15 of 20
15.3
PUBLIC CHOICE
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
Voting and the Median-Voter Rule
 FIGURE 15.4
The Median-Voter Rule
If Penny proposes a $3 billion
budget and Buck proposes a
$7 billion budget, the election
will result in a tie. By moving
toward the median budget,
Penny can increase her chance
of being elected. In equilibrium,
both candidates will propose a
budget close to the $5 billion
preferred budget of the median
voter.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
16 of 20
15.3
PUBLIC CHOICE
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
Alternative Models of Government: Self-Interest and Special Interests
Several economists, including Nobel Laureate James Buchanan, have suggested a
model of government that focuses on the selfish behavior of government officials.
According to this view, politicians and bureaucrats pursue their own narrow interests,
which, of course, may differ from the public interest.
The self-interest theory of government explains why voters sometimes approve
explicit limits on taxes and government spending.
• According to the self-interest theory of government, limitations on taxes and
spending are necessary safeguards against politicians and bureaucrats who
benefit from larger budgets.
Another model of government is based on the idea that small groups of people
manipulate government for their own gain.
• Whenever benefits are concentrated on a few citizens but costs are spread out
over many, we expect special-interest groups to form. Special-interest
organizations often use lobbyists to express their views to government officials
and policymakers.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
17 of 20
15.3
PUBLIC CHOICE
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
Which Theory Is Correct?
Economists and political scientists have studied many dimensions of the decisionmaking processes underlying tax policies and spending policies.
• There is evidence that people do vote with ballots and with their feet, and that
these two forms of voting make a difference.
• There is also evidence that government officials sometimes pursue their own
interests and those of special-interest groups.
The field of public choice is a very active area of research for both economists and
political scientists.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
18 of 20
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
APPLICATION
4
POLITICIANS ARE LIKE ICE-CREAM SELLERS
APPLYING THE CONCEPTS #4: What is the economic
logic of the median-voter rule?
 FIGURE 15.5
Competition on a Beach Leads to a Median
Location for Both Sellers
(A) If one seller starts at the 1/4 mile mark and
the other starts at the ¾ mile mark, each has a
territory of one-half mile and sells 60 cones.
(B) If Lefty moves to the median location, his
territory increases to the 5/8 mile mark, and he
sells 75 cones, compared to 45 for Righty.
(C) Righty can recover her lost territory by moving
to the median location. In equilibrium, both sellers
locate at the median location and each has half
the market.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
19 of 20
KEY TERMS
Microeconomics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
C H A P T E R 15
Public Goods and
Public Choice
external benefit
free rider
median-voter rule
private good
public-choice economics
public good
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
20 of 20