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 product.
Objectives:
1. Public goods will not be supplied in the proper amounts by the free-market mechanism.
a) pure public goods include those goods (or services) for which there is "joint (non-rival) consumption with non-exclusion." It is difficult to determine how much a public good is worth to each individual because they may be able to benefit without having to declare how much it is worth to them (free rider problem).
b) 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 in government expenditures on public goods.
a) special interest groups and "logrolling"
b) government provision of services is not subject to the "competitive discipline" that private sector firms face.
c) because the free-market mechanism will not supply public goods in the proper amounts, political processes are necessary to determine how much and how many public goods will be produced.
| Key Economic Concepts free riders, theory of social choice, positive externalities, non-rival consumption, merit goods, non-exclusion, public goods, tax distortions, inefficient allocation of resources. |
| Contemporary Issues Many blamed the success of the terrorist attacks of September 11, 2001 on lax airport security, which was mandated by the federal government, but run by private security firms at the expense of the airlines. Under severe cost pressures (because the economy was in recession) and because of complacency after years of no terrorist incidents in the U.S., most airlines cut back their funding for security. This was a classic example of a public good (security) being under-funded by the market. Some months after the terrorist attack, the federal government set up the Transportation Safety Administration and took over airport security. Who should ultimately foot the bill for the federal provision of airport security? The public at large? Airline travelers (through an airport tax)? |
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