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1.
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Study the introduction above.
What do you expect to learn from this lesson? Enter your answers on the right.
Study the
vocabulary words and look for them in the lesson. You will be tested on them.
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What
if the government decided to leave the business of road-building up to private citizens? If you
wanted a road in front of your house, you’d have to pay a contractor to build it. Or more
likely, you and your neighbors could chip in and hire someone to build you a small network of
streets.
What problems might arise in this scenario? For one thing, if groups of individuals
pooled their money to build a road or a freeway, who would they allow to use it? Would drivers have
to constantly stop and pay the owners of each road they drove on? How would individuals living in
sparsely populated areas come up with enough money to build the roads they
needed?
Public
Goods
Roads are one of many examples in which the
government provides a public good,
a shared good or service for which it would be inefficient or impractical (1) to make consumers
pay individually and (2) to exclude non payers. Dams are another example of public
goods.
Let’s look at the first feature, making consumers pay individually: How would you
like to receive a bill in your mailbox for your share of launching a space shuttle or cleaning Mount
Rushmore? To simplify the funding of government projects in the public interest, the government
collects taxes. What about the second feature of a public good, excluding non payers? As a society,
we believe that certain facilities or services should be available to all. Besides, excluding non
payers from highways would be a nightmare.
Most goods are public simply because a private
provider could not charge those who benefit or exclude non payers from benefiting. For example, in
1872, Congress created the nation’s first national park, Yellowstone. The national park system
ensured that the natural resources Americans value would be protected. |
If a park
were privately owned, the owner could charge an admission fee. Yet some benefits generated by the
park, such as the preservation of wildlife, would be enjoyed by non payers as well as payers. The
owner could neither charge people for that public benefit nor exclude them from it.
Public
goods have other characteristics:
Any number of consumers can use them
without reducing the
benefits to any single
consumer. For the most part, increasing the
number of consumers does not
increase the
cost of providing the public good. So if you’re driving on a highway and eight
other drivers come along, they do not significantly reduce the road’s benefits to you or
increase the government’s cost of providing it.
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2.
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What is the author suggesting
in the introduction at the top of the page?
a. | Individuals really do not need
government to provide for the needs of society, such as roads. | c. | People should build their own roads instead of relying on
the government. | b. | Individuals can’t provide all of the needs of society without the help
of government. | d. | The government should not allow
individual people to build their own roads. |
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3.
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Which of the following is an example of a public good?
a. | a city park | c. | a movie theater | b. | a grocery store | d. | cable
television |
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4.
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Which of the following is a critical rule for determining whether something is a
public good?
a. | The benefit to each individual who uses the facility is greater than the
cost. | b. | The benefits of the facility are greater for the society than for the individuals
using it. | c. | The total benefits to society are greater than the total cost. | d. | The total cost is
small for each individual taxpayer. |
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5.
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Which of the following is NOT an example of a public good?
a. | shopping malls | c. | highways | b. | national parks | d. | municipal
libraries |
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Costs and
Benefits
As you read
in Section 1, the federal
government steps in to act in the public
interest whenever it
determines that the
benefits of a policy outweigh the drawbacks.
In road construction, the
advantages
are obvious. The drawback is the
economic freedom we give up, since none
of us
individually gets to decide what
roads will be built, and where. Still, in this
example the
advantages of public road
construction outweigh the drawback. In
other cases, weighing benefits
against costs
is more complicated and open to debate.
Cost is critical in determining
whether
something gets produced as a public good.
| 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, and
2. the total benefits to society are greater
than the total
cost.
In such circumstances, the market would
not provide the good; the government
would
have to, or else it wouldn’t get done.
Study carefully Figure 3.4 on the next page.
Does
the dam-building project meet the
two criteria for a public good?
Public goods are financed by
the public
sector, the part of the economy that
involves the transactions of the
government.
The private sector, the part of the
economy that involves transactions of
individuals and businesses, would have little
incentive to produce public
goods. | | |
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6.
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The owner of the Chargers is
asking the city of San Diego to build a new stadium. He tells the city council that it would cost him
more to build the stadium than he could ever earn back in revenue. Further, he says, the city would
get back more in tourist dollars and other fees than it would cost the city to build the stadium. The
owner of the Chargers is describing the stadium as
a. | social experiment
| c. | a private good or
service | b. | a public good or service | d. | scientific experiment |
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7.
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What is the likely outcome if
the city of San Diego does not build a new stadium for the Chargers?
a. | some outside financial group will
likely come in with private money and build the stadium | c. | the stadium will not get built | b. | the cost of building the stadium will fall until the
Chargers can afford to build the stadium | d. | the Chargers will build the stadium
themselves |
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8.
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You do not always have to agree
with your textbooks. Look at this diagram. It shows the process that determines whether a public good
will be generated. If you are using public money to benefit a small group of farmers, are you then
using public money to provide a private good? People in the cities provided some of the tax dollars
for the project. How does the damn benefit them?
What do you think? Explain your ideas in a
short essay on the right.
Opportunity Costs If the farmers also wanted irrigation ditches
built to carry the lake water to their fields, would the ditches be built as a public good?
Explain.
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Free-Rider
Problem
A phenomenon
associated with public
goods is called the “free-rider problem.” A free rider
is someone who would not choose to pay for a certain good or service, but would get the benefits
of it anyway if it were provided as a public good.
Would you voluntarily contribute,
say,
$3,500 to buy army helmets? —your portion
of America’s military cost this
year?
Perhaps not. Yet when the government
provides a system of national defense,
you
benefit, whether you pay or not.
| Try another example: Everyone on
your
street wants fire protection except one
penny-pinching neighbor, who says it’s
not
worth the money. Do you want him to
have fire protection anyway? Yes. If his
house
catches fire, yours could ignite as
well. So local taxes pay for firefighting
services for all
property in a given area,
because all residents are better off if the
government provides this
service.
Returning to the example of roads, you
might not be willing to pay for a
new
freeway in your area. But if it is built, you
would use it. You would be a free
rider.
Free riders consume what they do not
pay for. The free-rider problem
suggests
that if the government stopped collecting
taxes and relied on voluntary
contributions,
many public services would have to
be
eliminated.
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9.
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A person who receives a public
good even though he does not pay for it is called a
a. | moocher | c. | tax payer | b. | free rider | d. | citizen |
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10.
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If you are in the bottom 50% of
wage earners in the United States you pay no federal income taxes. What are you likely to be called
by the people who do pay the taxes?
a. | a middle class
earner | c. | tax
supporter | b. | an entitlement | d. | free rider |
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11.
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The top 10% of tax payers in
the United States pay 70% or all taxes. Why is this true?
a. | Rich people are greedy and need to
be punished | c. | The graduated
income tax structure tends to punish the rich and favor the poor | b. | No body else has any
money | d. | The graduated income tax structure tend to punish the poor
and favor the rich |
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12.
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If the government no longer had
the ability to force people to pay taxes but instead had to rely in voluntary taxes from the people,
what would happen to public services in the United States?
a. | There would be fewer public services
and the people as a whole would suffer | c. | They would stay about the same because most people don’t mind paying
taxes and would continue to support public services | b. | Nothing, people would only provide services that were
really needed. | d. | People would have more money to
spend on public services and would be willing to do so |
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Market
Failures
Free riders are
examples of market failure, a
situation in which the market, on its own,
does not
distribute resources efficiently. To
understand market failure, recall how a
successful free
market operates: Choices
made by individuals determine what goods
get made, how they get made,
and who
consumes the goods. Profit incentives
attract producers, who, because of competition,
provide goods and services that
consumers need at a price they can afford.
In the
road-building scenario, are these
features of a free market present? No. If a
company did build
a road, it could charge a
high price for tolls because it would have no
competition. Also,
companies would not
choose to build roads in sparsely populated
areas because profit incentives
in those areas
might be non-existing. This way of getting
roads built would be highly
impractical.
| In this scenario, the criteria for a
properly functioning market system do
not
exist. That’s why economists consider this
situation a market failure.
Note
that public ownership can sometimes
produce negative externalities, however.
Some public lands,
for example, might be
more usefully managed if owned
privately.
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13.
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Car manufacturers in the United
States decide to produce automobiles without all of the environmental devices such as smog devices
and catalectic converters. The cars cost $1000 less than the same cars with environmental safeguards.
As a result most people choose to save the $1000 and the environment suffers. This is an example
of
a. | social
justice | c. | market
failure | b. | everyone benefits | d. | free riders |
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14.
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SDG&E, through negligence,
caused brush fires, that resulted in the loss of many homes. The people sued SDG&E but the
company said that their stock holders should not have to pay for the losses. Instead they got the
California Public Utilities Commission to raise the gas and electric rates for the SDG&E
customers. This is an example of
a. | market free
choice | c. | capitalism | b. | free enterprise | d. | market failure |
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Externalities
All of the previous examples involve side effects of some sort. They illustrate what
economists call externalities. An externality is 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 can be positive or negative, as follows.
Positive
Externalities
We’ve said that public goods generate
benefits to many people, not just those
who
pay for the goods. Such beneficial side
effects are called positive
externalities.
The private sector can create positive
externalities, too. In fact, many
experts
believe that the private sector generates
positive externalities more efficiently
than
the public sector can, and at less cost to
taxpayers. For instance:
• Dynamo
Computers hires underprivileged
teenagers and trains them to be computer
programmers. Those
workers are then
available to be hired by other companies,
who benefit from the workers’
skills
without having paid for them.
• Mrs. Garland buys an old house that is
an
eyesore in the neighborhood. She
paints the house, cuts the grass, and
plants flowers. Her
neighbors were not
involved in her economic decision. But
they receive benefits from it, such
as
higher property values and a better view.
Whether private or public,
positive
externalities cause part of the benefit of a
good to be gained by someone who did not
purchase it. In the 1990s, several endangered species, including the bald eagle and the peregrine
falcon, were saved from extinction. Protection of species critical to our ecosystem benefits us
all. | Negative
Externalities
Of course,
some decisions to produce goods
and services generate unintended costs,
called negative
externalities. Negative
externalities cause part of the cost of
producing a good or service
to be paid
for by someone other than the producer.
For example:
• The Enchanted
Forest Paper Mill dumps
chemical wastes into a nearby river,
making it unsafe for swimming.
The
downstream city of Tidyville is forced to
install special equipment at its water
treatment
plant to clean up the mess. If the treatment cost is $20 per ton of paper produced, and
the mill’s production cost is $100 (the cost of all the materials, labor, and machinery
required to produce it), the full, or social, cost of a ton of paper is $120. The community, not the
polluter, winds up paying that $20.
• Your next-door neighbor, Mr. Fogler, takes up the
accordion and holds Friday night polka parties in his backyard. Unfortunately, you hate polka
music.
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15.
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Companies depend on a well
educated labor force to do its work. People are educated by the public school system operated by the
government. Remember, the company does pay taxes like everyone else to support the school system. Can
we claim that the company is benefiting from a positive externality in this
situation?
a. | Yes, this is a positive externality
for the companies | c. | It is hard to tell
because the company is part of the community and shares in the costs of
education | b. | No, this is a negative externality for the
companies | d. | Education cannot be an externality
because it operates from inside the government |
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16.
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Cox cable provides cable TV
service to the community. We have hundreds of channels on many topics to satisfy our entertainment
and educational needs. At the same time much of the content on cable TV is inappropriate for young
children. Some programming can be classified as pornographic. What does this show about cable
TV?
a. | Cable TV produces only positive
externalities | c. | Cable TV has both
positive and negative externalities associated with its service | b. | Cable TV has no externalities associated with it because
people know that they are getting when they subscribe to the
service | d. | Cable TV produces only negative
externalities |
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17.
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How would a outdoor sportsman
see the externalities created by the creation of the lake or dam?
a. | positive | c. | neutral | b. | negative |
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18.
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How would an environmentalist
see the externalities created by the creation of a lake by a dam?
a. | positive | c. | neutral | b. | negative |
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Government’s Goals
In a pure market economy, the buyer gets the benefits of a
good or service through their purchases. You buy something, you get the benefit. Also, your purchases
determine what and how much will be produced.
When externalities are present, we have
a
market failure, because the costs or benefits
of a good or service are not
assigned
properly. Understanding externalities helps
us see how the government functions in
the
American economy.
First, the government encourages the
creation of positive
externalities. Education,
for example, benefits students, yet society
as a whole also benefits
from an educated
population. This is because educated
workers are generally more
productive.
| Next, the government aims to limit
negative externalities, such as acid
rain.
Pollutants from coal-burning power plants
and auto emissions can drift high into
the
atmosphere and come down in the form of
acid rain, which causes ecological damage.
Why
is acid rain a negative externality? It is
part of the cost of producing power and
driving
cars, but for decades that cost was
being imposed upon people other than the
producers of this
pollution. The cost was
damaged trees, lakes, and wildlife.
To help address this negative
externality,
the federal government now requires all
new cars to have an expensive
antipollution
device called a catalytic converter. In
addition, the Environmental
Protection
Agency offers incentives to power-plant
operators to put “scrubbers? ”
on their
smokestacks to cut emissions. These
actions transfer the costs of pollution back
to
its producers.
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19.
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Why is there a market failure
when externalities are present?
a. | Only the government has positive
externalities | c. | Only the
government has negative externalities | b. | private purchases have no externalities | d. | The buyer may not receive the benefits or costs of what they
purchase |
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20.
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What is the governments
attitude toward positive
externalities?
a. | The government encourage policies
that produce them | c. | The government
ignores positive externalities | b. | The government discourages policies that produce
them | d. | The government operates only through free
markets |
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21.
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When the government encounters
a negative externality it
a. | ignores
it | c. | discourages
it | b. | encourages
it |
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A
Libertarian Point of View
John Stossel
In "Myths, Lies
and Downright Stupidity," I bet my readers $1,000 that they couldn't name one thing that
government does better than the private sector.
I am yet to pay.
Free enterprise does
everything better.
Why? Because if private companies don't do things efficiently, they
lose money and die. Unlike government, they cannot compel payment through the power to
tax.
Even when a private company operates a public facility under contract to government, it
must perform. If it doesn't, it will be "fired" — its contract won't be
renewed. Government is never fired.
Contracting out to private enterprise isn't the same
thing as letting fully competitive free markets operate, but it still works better than
government.
Roads are one example. Politicians call road management a "public good"
that "government must control." Nonsense.
In 1995, a private road company added two
lanes in the middle of California Highway 91, right where the median strip used to be. It then used
"congestion pricing" to let some drivers pay to speed past rush-hour traffic. Using the
principles of supply and demand, road operators charge higher tolls at times of day when demand is
high. That encourages those who are most in a hurry to pay for what they need. It was the first time
anywhere in the world that congestion pricing was used. Bureaucrats were skeptical. Now congestion
pricing is a hot idea for both private and public road management systems.
Likewise, for years
there was a gap in the ring road surrounding Paris that created huge traffic problems. Then private
developers made an unsolicited proposal to build a $2 billion toll tunnel in exchange for a 70-year
lease to run it. They built a double-decker tunnel that fits six lanes of traffic in the space
usually required for just two. The tunnel's profit-seeking owners have an incentive to keep
traffic moving. They collect tolls based on congestion pricing, and tolls are collected
electronically, so cars don't have to stop. The tunnel operators clear accidents quickly. Most
are detected within 10 seconds — thanks to 350 cameras inside the tunnel. The private road has
cut a 45-minute trip to 10 minutes.
Indiana used to lose money on its toll road. Then Gov.
Mitch Daniels leased it to private developers. Now it makes a profit. The new owners spent $40
million on electronic tolling. That's saved them 55 percent on toll collection. They saved $20
per mile by switching to a better de-icing fluid. They bought a new fleet of computerized snowplows
that clear roads using less salt. Drivers win, and taxpayers win.
It also turns out that
government roads often run more smoothly when drivers have more, not less,
freedom.
Contrast:
Public housing vs private housing
Public schools vs private
schools
Public parks vs private parks
The old public phone company vs the new private phone
companies.
Public highways such as 805 and 5 vs the private highway, 215
Once again,
freedom and responsibility triumph.
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22.
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Libertarians believe
that
a. | the government always does things
better than private enterprise | c. | there is little or no difference between the performance of government and
private enterprise | b. | private enterprise always does things better than
government | d. | if private enterprise did things
better there would no need for government |
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23.
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Libertarians believe
a. | private schools are better than
public schools | c. | private parks are
better than public parks | b. | privately owned homes are better than public
housing | d. | all of these items are
true |
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24.
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Which group would most favor
the free market approach to economics?
a. | Libertarians | c. | Communists | b. | Socialists | d. | Progressives |
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25.
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Libertarians are likely to
believe
a. | government should increase taxes to
provide needed public services | c. | government needs to create more laws to safeguard the
public | b. | government should lower taxes so individuals have the resources to solve their
own problems | d. | government knows
best |
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a. | public
sector | d. | public
good | b. | externality | e. | market failure | c. | free rider | f. | private sector |
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26.
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the part of the economy that
involves the transactions of individuals and businesses
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27.
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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
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28.
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a shared good or service for which it would be impractical
to make consumers pay individually and to exclude non payers
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29.
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a situation in which the market does not distribute
resources efficiently
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30.
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the part of the economy that involves the transactions of
the government
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31.
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someone ho 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
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