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Economics U$A: 21st Century Edition

Public Goods and Responsibility (Microeconomics)

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In 1937 the Tennessee Valley Authority (TVA), a government-owned utility company, was created to electrify rural communities and control flooding. 1965 marked the first U.S. attempt at national health insurance in the passage of Medicare and Medicaid. In response to 9/11, the U.S. Transportation and Security Administration replaced private security firms with federal employees. A perfectly competitive market does not always provide the right amount of goods, so government fills the gap with public goods. The debate on just how much the government should produce is highlighted in these stories.

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Unit Overview

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.
    • 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).
    • 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:
    • special interest groups and “logrolling”
    • government provision of services, which is not subject to the “competitive discipline” that private sector firms face
    • 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

Meet the Series Experts

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. In 1970, after eleven different sponsorships from Randolph, amendments to the Voting Rights Act lowered the voting age to 18 in both local and national elections. Prior to serving in Congress, he was the Associate Editor of the West Virginia Review at Charleston, West Virginia, and head of the department of public speaking and journalism at Davis and Elkins College. Between his House and Senate terms, he served as Dean of the college’s School of Business Administration. Mr. Randolph graduated from Salem Academy in 1920 and Salem College in 1922.

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. Previously, he taught at the University of Maryland, served as Assistant Secretary for Planning and Evaluation at the Department of Health, Education, and Welfare, and chaired the 1979 Advisory Council on Social Security. He is a member of the Institute of Medicine, the American Academy of Arts and Sciences, the Advisory Committee of the Stanford Institute for Economic Policy Research, and the Visiting Committee of the Harvard Medical School, and he serves on the Board of Directors of Abt Associates and the Center on Budget and Policy Priorities. He has been Vice President of the American Economic Association and President of the Association of Public Policy and Management. Dr. Aaron received his B.A. from U.C.L.A. and Ph.D. in Economics from Harvard University.

Wilbur Cohen

Social scientist expert on the welfare state and key player in the creation of New Deal and Great Society programs. He began as a research assistant during the drafting of the Social Security Act and rose to become Director of the Bureau of Research and Statistics in charge of program development and legislative coordination with Congress for the Social Security Board. In 1956, he became Professor of Public Welfare Administration at the University of Michigan, until President John F. Kennedy appointed him Assistant Secretary for Legislation of Health, Education, and Welfare. President Lyndon B. Johnson elevated him to Under Secretary in 1965, then to U.S. Secretary of Health, Education, and Welfare, in 1968. Years later, his name would be synonymous with the creation of Medicare. Mr. Cohen received his B.A. from the University of Wisconsin.

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. He has taught at the Woodrow Wilson School of Public and International Affairs at Princeton University, the Yale School of Organization and Management, and the University of North Carolina at Chapel Hill. His writing has been published in the Wall Street Journal, the Washington Post, Journal of Commerce, and the New York Post. He has also appeared on CNN, CNBC, Fox News Channel, and Voice of America. Dr. Van Doren received his B.A. from the Massachusetts Institute of Technology and M.A. and Ph.D. from Yale University.

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. Earlier, as General Counsel of the U.S. Treasury Department, he had a significant role in developing proposals for the deregulation of the financial services industry. He also served as White House Counsel to President Ronald Reagan. His books include: Ronald Reagan: The Power of Conviction and the Success of His Presidency; Competitive Equity: A Better Way to Organize Mutual Funds; Privatizing Fannie Mae, Freddie Mac and the Federal Home Loan Banks; The GAAP Gap: Corporate Disclosure in the Internet Age; and Optional Federal Chartering and Regulation of Insurance Companies. Mr. Wallison attended the Capitol Page School and received his B.A. from Harvard University and L.L.B. from Harvard Law School.

What's your Economics IQ?

Take the Economics USA: Public Goods and Responsibility Quiz here.

Quiz addendum:

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…

Answer:

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.

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…

Answer:

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

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

Answer:

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

Glossary

  • free riders
    Those that enjoy the benefits of a collective effort, while having contributed nothing to that collective effort.
  • Inefficient allocation of resources
    Occurs when government ineffectively intervenes in market decisions (a.k.a. “government failure”).
  • merit goods
    Goods or services provided for free by a government based on need, rather than ability to pay.
  • nonrival consumption
    Consumption by one consumer does not affect the ability of other consumers to consume the same unit of the same good.
  • non-exclusion
    The concept whereby it is not possible to keep those who have not paid for a good from having access to it and using it.
  • public goods
    Goods and services which can be consumed by one person without diminishing the amount of them that others can consume and which there is no way to prevent citizens from consuming, whether they pay for them or not.
  • tax distortions
    Inefficiencies in the free market, resulting from the imposition of taxes.
  • theory of social choice
    The philosophical and mathematical study of the type of conclusions that can be determined through various aggregation methods to create a social welfare function from individual preferences.

Listen to the Audio Program

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Economics U$A: 21st Century Edition

Credits

Produced by the Educational Film Center. 2012.
  • Closed Captioning
  • ISBN: 1-57680-895-5