|
0. Social Cost &
Benefit
As we have seen government may not accept the 'X'
marks the spot out come of the market for reasons of equity. Until
now, however, we have assumed that market price includes or
'internalizes' all relevant costs and benefits. This means the
consumer capture all the benefits and the firm pays all the costs.
There are, however, cases in which this is not the case. In
effect, the market demand curve reflects only the marginal private
benefits (MPB) of consumers but not the 'external' benefits to society.
When we add these external benefits
(P&B
7th Ed Fig. 16.5 & Fig. 16.6) to the market demand curve we derive a new
marginal social benefit curve (MSB) that includes both private and
public benefits. Similarly, the market supply curve reflects the
marginal private costs (MPC) but there may be costs external to the
firm, e.g., pollution, that society must pay. When we add the
social costs to the supply curve we derive a new marginal social cost (MSC)
curve reflecting both marginal private and marginal social costs.
Put another way, the market 'X' solution does not internalize all of the
external costs and benefits associated with an industry - consumption &
production. It is up to government to correct for the
miscalculation of private agents to generate
a new equilibrium (P&B
7th Ed. Fig. 16.7). But how does government decide?
1.
Economic Theory of Government
- positive analysis: reasons for and effects of government involvement in
the economy
- normative analysis: desirability of government involvement
- essentially two reasons: internal and external to narrowly defined economics
- split of old 'political economics' into political studies
and economics resulting in 'the economics of democracy'
2. Market Failure
- origin of anti-government involvement from Mercantilist undemocratic
government
- separation of market from political influence: Adam
Smith's test of 'bad' political economy: can political power be converted
into economic profit and can economic profit be converted into political
power?
- evolved idea of perfect competition; interestingly perfect competition
assumes no government involvement just as in the Marxian forecast of the
'withering away of the State"
- where perfect competition does not exist, role for government to
approximate outcome is PC operative
a) public goods
b) inequities
c) imperfect competition
d) externalities
3. Public Choice
a) Voters - Rational Apathy
b) Politicians - Impossibility Theorem
c) Bureaucrats - Three Laws of Technocracy
i - Confuse & Conquer
ii - What We Don't Know Won't Hurt us
iii - When in Doubt Privatize
4. Public Goods
a) Excludability/Rivalry - Free-Rider Problem
b) Cost/Benefit Analysis and other 2nd best solution
c) Effectiveness vs Efficiency
5. Taxes:
ability to pay vs benefits
a) Income Taxes - individual & corporate (insidence))
b) Excise Taxes
c) Sales Tax
d) Property Taxes
e) Fees for Service and Cost Recovery Charges
f) Capital Gains
g) Other
6.
Extract: Rusty Nail on the Information Highway: User Charges and
Canadian Federal Government Information
http://www.usask.ca/library/gic/v3n4/chartrand/chartrand.html
Public goods are goods that can be consumed by one person
without diminishing the consumption of the same good by another consumer
and where exclusion of potential consumers is not feasible. In principle,
a private good generates strictly private benefits for which a competitive
market levies a price capturing all consumer benefits and thereby covering
production costs plus a profit. It is the hope of making such a profit
that motivates private producers. A public good, however, generates
benefits extending beyond individual users, e.g. national defense,
immunization against contagious diseases, clean air and water, etc. The
benefits of public goods can only partially be captured by market price.
Accordingly, private producers will not supply public goods and services,
or will not supply them in sufficient quantity or quality to meet
society's demand. Public goods must therefore be supplied by government or
not at all. There are six basic criteria that can be applied to determine
whether or not a particular good or service is more or less a 'public
good'. Grouping them into pairs, these criteria are:
a) rivalness and excludability in consumption;
b) economies of scale and lumpiness in production; and,
c) externalities and socio-political objectives transcending market
outcomes.
a) Rivalness
& Excludability
Rivalness and excludability are primary criteria for
determining if a good or service is "public" in consumption. Purely public
goods and services are "non-rivals" in consumption, i.e. consumption by
one user does not reduce the amount available to another. If I watch a
fireworks display it does not reduce the amount available to you. On the
other hand, a purely private good such as an apple can be consumed only
once and is then not available to another consumer. Purely public goods
are also non-excludable, i.e. a user cannot be easily prevented from using
a public good or service without paying for it. Extending the fireworks
example, while I may not be willing to pay to enter the stadium, I can
still watch the display from the balcony of my apartment building at no
charge. Private goods, on the other hand, exhibit a high degree of
excludability. Thus if I own a car I can lock the door excluding others
from using it.
b) Economies
of Scale & Lumpiness
Economies of scale and lumpiness are weaker criteria
suggestive of whether or not a good or service may be more or less
"public" in production. Economies of scale refers to decreasing cost per
unit output, i.e. it is cheaper--per unit--to produce more than less. A
major factor contributing to economies of scale is division and
specialization of labour. Adam Smith discovered long ago that more pins
can be produced per worker if each worker specializes in one part of
production, e.g. the shaft or the head. In most industries there exists
some "minimum optimum scale" of production. Below this level, cost per
unit output is too high to be competitive. "With unit costs decreasing as
scale increases, efficient private sector provision...can be difficult to
achieve." 10 Lumpiness refers to the sheer size of initial investment
required to produce a given good or service. While a pin factory can begin
as a one-person firm with a minimum investment, a long distance telephone
network requires an enormous initial investment before the service can be
provided. Put another way, an enormous amount of initial cost must be
"sunk" before production of long distance services is possible. Hence
lumpiness is also called "sunkeness of cost." A "lumpy" private good like
a telephone network exhibits rivalness and excludability, i.e. a limited
number of lines are available to subscribers or pay-per-use callers who
compete for access, especially during peak hours. Public goods, on the
other hand, like an immunization campaign against a contagious disease
requires an enormous initial investment, but users are additive or
collaborative in consumption, i.e. the more who consume, the greater the
benefit to all.
c)
Externalities & Socio-Political Objectives
Externalities and socio-political objectives are criteria
that transcend the marketplace and are critical in determining whether or
not user charges are appropriate for a given federal good or service.
Externalities are the unintended benefits or costs accruing to persons
other than direct consumers or producers. The classic cost example is
downstream pollution from a mill or factory. In the absence of
anti-pollution laws, a mill may discharge effluent into a river at no cost
to its owner. Downstream, however, citizens and communities drawing water
from the river must either pay to remove the pollution or suffer the
health effects of it. The mill need not "internalize" these "external"
costs of production into the market price of its output. A case of
positive externalities is an immunization campaign against an infectious
disease. Thus someone fearful of needles need not be immunized to enjoy
the benefits, at low risk to him or herself, if everyone else in the
population is immunized. Many public goods are produced by government
because of external effects. For example, while the private benefits of
municipal roads, sewers, and clean water supplies are positive, no single
individual or company can afford to provide them and/or the political
implications of monopoly are unacceptable in a democratic society. Such
"social overhead capital" improves the health and economic well-being of
established citizens and serves to attract new private investment. While
some social overhead capital is utilitarian or functional in nature, for
example, roads, there are also "amenities" like parks, recreation and
cultural facilities. The role of such amenities is captured in "the
amenities theory of industrial location." In this regard, a number of
years ago the Arts Council of Great Britain ran with the advertising
slogan "What sunshine is to Florida, theatre is to London!" Social and
political objectives refer to non-economic benefits and costs that are
considered sufficiently important to justify collective public action. In
the case of benefits, such goods and services are called "merit goods." In
the case of costs, they are called "demerit" goods and services. There are
thus times and situations in which a democratic government decides that
the free market is not producing socially or politically acceptable
outcomes. In such cases, government may choose to override the
marketplace. A traditional cost example is the criminal law system, which
applies the coercive powers of the State to stop activities that, at any
point in time, are viewed as harmful to society, e.g. Prohibition. A
classic benefit example is regional development. Market outcomes may leave
a given region poor and underdeveloped. The federal government may use tax
dollars to supplement local income or services or offer incentives--favourable
loans, grants, or tax relief--to private enterprise to locate in such
regions even though the market clearly indicates this is not an economic
decision. In such cases the goods and services provided constitute "merit
goods," the most extreme case of public goods. Such goods or services are
deemed by a democratic government to be good for society even though the
market, for economic or other reasons, is unable or unwilling to provide
them.
7. Related HHC Web Articles
Rusty Nail on the Information Highway: User Charges and
Canadian Federal Government Information
http://www.usask.ca/library/gic/v3n4/chartrand/chartrand.html
Intellectual Property in the Global Village
http://www.usask.ca/library/gic/v1n4/chartrand/chartrand.html
Federal Cultural Budget 1996
http://www.usask.ca/library/gic/v2n3/chartrand2/chartrand2.html |
