ECO 481:Public Choice Theory

Week 2 - Part I:Week 2 - Part I:

The Rationale for The Rationale for

GovernmentGovernment

Dr. Dennis Foster

Market FailureMarket Failure

The Case of Public Goods:The Case of Public Goods:• Non-excludable & non-rival.• Free rider problem.• Private markets will “underprovide.”–Graphical representation.

The Case of Negative Externalities:The Case of Negative Externalities:• Free rider problem.• Private markets will “overprovide.”–Graphical representation.

Welfare Economics

Sources of market failure:Sources of market failure:• Market is not exhausting all advantageous

trade– Public Good & positive externality.

• Negative externalities.• Information problems.• Market instability.

Policy prescriptions:• Persuasion/Regulation/Gov’t Expenditure

Rethinking Market Failure

The Market Process:The Market Process:

• The coordination of activity.–What do people want?

• The competing use of scare resources.–How much is right?

– The role of prices.

– The role of profit & loss.

• I, Pencil and Milton Friedman’s version.

• Markets need . . . stable legal structure (?)

Assessing Market Failure

Public Goods:Public Goods:• How much is right?– The “well balanced” transportation system.

• How do you finance?– Free rider is replaced by “forced rider.”–Does that really alleviate this “problem?”

• Should any good with MC=0 be provided?• How would the market respond?–Bus vs. cab example.

Assessing Market Failure

Imperfect Competition & Information Issues:Imperfect Competition & Information Issues:• Monopoly harm . . . to whom?• Is there such a thing as “predatory

pricing?”• Monopoly shortcomings & government.• Political response of anti-trust laws.

• Can we actually have perfect information?• Hayek and the market process.

Distribution Issues:Distribution Issues:• Markets reward contribution, not effort.• Is there an “arbitrary distribution of natural

abilities?”• Star Parker - what does gov’t redistribution

do?• How many are on food stamps?–Who benefits from food stamps?– Stossel and cotton subsidies.

Market Failure

Transaction Costs & Regulation:Transaction Costs & Regulation:• Standardizing - weights and measures.• Can’t markets reduce these costs?

• Do regulations really reduce these costs?– Stossel video (Institute for Justice)–Coyote blog– Toys

• Do businesses like to compete?

ECO 481:Public Choice Theory

Week 2 - Part I:Week 2 - Part I:

The Rationale for The Rationale for

GovernmentGovernment

Dr. Dennis Foster