CHAPTER 18W
CHAPTER 18W
McGraw-Hill/Irwin
GOVERNMENT
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
Public Goods
Public Choice
Income Distribution
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Public Goods
Pure public good: a good that has a high
degree of nondiminishability and
nonexcludability.
Each person must consume the same amount of
it.
Collective good: a good that is excludable
and has a high degree only of
nondiminishability.
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Figure 18.1: The Aggregate Willingnessto-Pay Curve for a Public Good
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Figure 18.2: Equilibrium in a Market
for Jointly Produced Products
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Figure 18.3: Optimal Provision
of a Public Good
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Paying For Q*
If the government is to produce Q* units of a
public good, it must somehow raise sufficient tax
revenue to cover the total production costs of that
amount.
The willingness to pay for public goods is
generally an increasing function of income.
The rich, on the average, assign greater value to public
goods than the poor do, not because they have different
tastes but because they have more money.
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Private Provision Of Public Goods
How can the good be paid for, if not by mandatory
taxes?
Funding by Donation
Free riding: choosing not to donate to a cause but still
benefiting from the donations of others.
Sale of By-Products
Development of New Means to Exclude
Nonpayers
Private Contracts
Clubs
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Figure 18.4: The Trade-Off between
Privacy and Cost
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Figure 18.5: The Power of
the Median Voter
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Public Choice
Majority voting: by this standard, projects
favored by a majority—in either a direct
referendum or a vote taken by elected
representatives—are adopted and all others
are abandoned.
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The Median Voter Theorem
The median voter theorem states that whenever
alternatives can be ranked according to their
closeness to each voter’s ideal outcome, majority
voting will always select the alternative most
preferred by the median voter.
Median voter: the voter whose ideal outcome lies
above the ideal outcomes of half the voters.
Single-peaked preferences preferences that exhibit a
single most-preferred outcome, with other outcomes
ranked lower as their distances from their mostpreferred outcome increases.
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Cost-benefit Analysis
Cost-benefit analysis: an alternative to
majority voting that attempts to take explicit
account of how strongly people feel about
each of the alternatives under consideration.
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The Rawlsian Criticism Of The Marginal
Productivity System
The most common criticism to the marginal
productivity system is that it often generates
a high degree of inequality.
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Rawls Experiment
“What constitutes a just distribution of income?”
To answer using the following thought
experiment:
Imagine that you and the other citizens of some country
have been thrown together in a meeting to choose the
rules for distributing income. This meeting takes place
behind a “veil of ignorance,” which conceals from each
person any knowledge of what talents and abilities he
and others have. No individual knows whether he is
smart or dull, strong or weak, fast or slow, and so on—
which means that no one knows which particular rules
of distribution would work to his own advantage
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Fairness and Efficiency
Inefficient solutions make the economic pie
smaller for everyone, rich and poor alike.
If efficient solutions are adopted, it must be
possible for everyone to receive a larger slice.
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Figure 18.6: Charging for
Directory Assistance
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Methods Of Redistribution
Our Current Welfare Programs
The Negative Income Tax (NIT)
Public Employment for the Poor (JOBS)
A Combination of NIT and JOBS
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Figure 18.7: Benefits iersus Income
for a Typical Welfare Program
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The Negative Income Tax
Gives every man, woman, and child—rich
or poor—an income tax credit that is large
enough to sustain a minimally adequate
standard of living.
Someone who earned no income would receive
this credit in cash. People with earned income
would then be taxed on their income at some
rate less than 100 percent.
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Figure 18.8: A Negative Income
Tax Program
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Figure 18.9: Income Source in
the NIT-JOBS Program
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