Chapter 17
McGraw-Hill/Irwin
Copyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Government
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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 17.1: The Aggregate Willingness-to-Pay
Curve for a Public Good
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Figure 17.2: Equilibrium in a Market
for Jointly Produced Products
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Figure 17.3: 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 17.4: The Trade-Off between
Privacy and Cost
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Figure 17.5: 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 most-preferred 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 17.6: 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 17.7: Benefits versus 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 17.8: A Negative Income
Tax Program
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Figure 17.9: Income Source in
the NIT-JOBS Program
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