Unit 13 — Public Goods and Responsibility

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Purpose:

To define “public goods,” to show how a perfectly competitive market will not automatically result in the production of the proper amount of such goods, to illustrate the hidden cost of taxation, and to show the problems of determining exactly what and how much the government should produce.

Objectives:

  1. Public goods will not be supplied in the proper amounts by the free-market mechanism.

    1. Pure public goods include those goods (or services) for which there is “joint (nonrival) consumption with non-exclusion.” It is difficult to determine how much a public good is worth to particular individuals because they may be able to benefit without having to declare how much it is worth to them (free-rider problem).
    2. There may be positive externalities (merit goods).
  2. Taxes usually have hidden costs. They distort economic decisions regarding investment, work effort, savings, and consumption. This usually causes the economy to be less efficient than it would be in the absence of taxation.
  3. There are numerous special problems related to government expenditures on public goods:

    1. special interest groups and “logrolling”
    2. government provision of services, which is not subject to the “competitive discipline” that private sector firms face
    3. the necessity for political processes to determine how much and how many public goods will be produced, because the free-market mechanism will not supply public goods in the proper amounts

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Meet the Series Experts

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Henry Aaron

Henry Aaron

Senior Fellow of Economic Studies at the Brookings Institution and noted health-care expert, focusing on financial reform of Medicare, Medicaid, Social Security, and tax and budget policy.

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Wilbur Cohen

Wilbur Cohen

Social scientist expert on the welfare state and key player in the creation of New Deal and Great Society programs.

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William Jennings Randolph

William Jennings Randolph

U.S. Congressman from West Virginia, 1933–1947, and U.S. Senator, 1958–1985, where he was Chair of several committees and achieved note for sponsoring an amendment to the Constitution that would grant citizens between 18 and 21 the right to vote.

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Peter Van Doren

Peter Van Doren

Senior Fellow at the Cato Institute, Editor of the quarterly journal Regulation, and expert in the regulation of housing, land, energy, the environment, transportation, and labor.

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Peter Wallison

Peter Wallison

Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute (AEI) and Co-Director of AEI’s program on financial policy studies, specializing in banking, insurance, and securities regulation.

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  1. Weavemore Textiles is dumping pollutants into the Green River, causing problems with the water supply for the Hide-Away Hotel, four miles downstream. Thus far, Weavemore has taken no steps to correct the problem. The MOST LIKELY way in which the government might deal with this situation would be to...

    impose a tax on Weavemore Textiles.

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  2. Look at the following graph showing the demand and supply curves for a competitive industry. If D1 is the demand curve reflecting externalities in this industry, then we can assume that...

    chart chart

    The social benefits from production exceed those measured by the industry’s demand curve. The first option is incorrect because though subsidizing could shift the demand curve to the right, this illustration only reflects the externalities — in other words, what the socially optimal demand should be, given the benefits of the production.

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  3. The experience of Proposition 13 in 1978 tends to illustrate the fact that during the late 1970s most California voters...

    felt that local government services were no longer worth the tax costs.

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  4. Assume that a sales tax is imposed on a product represented by the diagram below. The amount of the tax is best illustrated by the letters...

    chart chart

    DF. This is the vertical distance between the two supply curves.

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  5. The amount of the tax shifted onto the consumer is best illustrated by the letters...

    chart chart

    DE. This is the difference in equilibrium prices under the pre- and post-tax supply curves.

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  6. The benefit principle of taxation states that...

    people who receive more from a government service should pay more to support it.

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