Chapter 18
Government
Chapter Outline
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Public Goods
Private Provision of 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 consumes 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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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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Figure 18.5: The Power of
the Median Voter
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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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Local Public Goods and the Tiebout
Model
• Even with a perfect mechanism for choosing
between alternative public goods, it is difficult to
escape the need for painful compromise.
• Professor Charles Tiebout suggested that at least
some of these compromises can be avoided if
people are free to form communities with others
of similar tastes.
– Those who favor high levels of public goods can group
together in communities in which they accept the high
tax rates necessary to finance these levels.
– Those who favor a more limited menu of public goods
and services can form groups of their own and have
lower tax rates.
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Rent Seeking
• When there are large gains to be had from a
project, private parties are willing to spend
large sums in order to enhance their odds of
being chosen as its beneficiaries. Pursuit of
these gains is know as rent seeking.
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Income Distribution
• Determinate outcome: the theory of
competitive factor markets tell us that each
factor will be paid the value of its marginal
product, and that in long-run competitive
equilibrium, these payments will add up to the
total product available for distribution.
• It rewards imitative, effort, and risk taking.
The harder, longer, and more efficiently a
person works, the more they will be paid.
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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’ Thought 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
• The distribution of income chosen from behind this
veil of ignorance constitutes what would be
considered fair and just.
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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
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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 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 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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