Public Goods and Services. What Kind of Economy does the US have? We have a MIXED free-market economy…

Public Goods and Services

What Kind of Economy does the US have? We have a MIXED free-market

economy… Because although MOST goods and

services are provided by private businesses…

There is also LIMITED GOVERNMENT INVOLVEMENT…

And so some ESSENTIAL goods and services are provided by the government.

Public Goods A public good is a good

or service that is provided by the GOVERNMENT.

The government controls the PUBLIC SECTOR of the economy.

Everything else is provided by the PRIVATE SECTOR.

Which sector of the US economy is BIGGEST?

The PRIVATE SECTOR.

Why Must the Government Provide Some Goods and Services?

With most products, if you cannot or will not pay, what happens?

YOU DON’T GET IT. But there are some products from which we

CANNOT exclude non-payers… And if we cannot EXCLUDE non-payers from

using something, the government must provide it.

We cannot tell certain people that they are PROHIBITED from using sidewalks and roads…

We cannot tell certain people that they will not be protected by law enforcement…

So, the government must provide these things.

The Free Rider ProblemThe Free Rider Problem Public goods are also necessary Public goods are also necessary

due to the “due to the “Free RiderFree Rider” ” problem…problem…

Public goods are usually Public goods are usually impossible for a private impossible for a private business to establish a business to establish a one-to-one-to-one link between payment & one link between payment & receipt.receipt.

Suppose an area has a terribleSuppose an area has a terrible mosquito problem…mosquito problem…

And a neighbor decides toAnd a neighbor decides to create a neighborhood fund create a neighborhood fund to to pay for mosquito control.pay for mosquito control.

And then asks every neighbor And then asks every neighbor to contribute to contribute $25.00 $25.00 for the for the serviceservice..

What would happen?What would happen?

Which of the following is NOT an example of a public good?

A.) a cheeseburger from McDonalds.

B.) a cheeseburger from the school cafeteria.

C.) this class.

D.) the Powder Springs Post Office.

Stupid Stupid PeoplePeople

Finally, public goods have to be provided because many people are Finally, public goods have to be provided because many people are very stupid. very stupid. Let’s say that fire departments were privately owned and Let’s say that fire departments were privately owned and NOTNOT run by the run by the

government.government. And people could choose to buy And people could choose to buy “fire protection” for $75“fire protection” for $75 a month, or they could a month, or they could

choose to spend the money on something else. What would probably happen? choose to spend the money on something else. What would probably happen? Some people, if given the option, would not choose to pay for Some people, if given the option, would not choose to pay for fire protection…fire protection… But if their house were to catch fire, it could But if their house were to catch fire, it could spreadspread to yours… to yours… So the government has decided to provide fire protection to So the government has decided to provide fire protection to everybody, everybody, whether whether

they want to pay for it or not.they want to pay for it or not.

Market Failure All of the previous

situations were examples of market failure--

A situation in which the free market does not provide a good or service efficiently.

Whenever market failure occurs, the government should provide the service.

Externality:Externality:An economic side effect An economic side effect of a good or service that of a good or service that

generates generates benefits or benefits or costscosts to someone other to someone other

than the person who than the person who decides how much to decides how much to produce or consumeproduce or consume..

Positive ExternalityThese occur when a business

transaction is conducted…And somebody OTHER than the

buyer and seller receive unexpected benefits.

Example—Mrs. Garland buys an old house that is an eyesore in the neighborhood…

She fixes it up, repaints it, plants flowers, etc.

Her neighbors were not involved in this decision…

But they benefit because the neighborhood looks nicer…property values have risen, etc…

The government often tries to ENCOURAGE positive externalities.

Negative ExternalitySome transactions generate

unintended costs…Negative Externalities cause

part of the cost of a transaction to be paid by somebody other than the buyer or the seller.

Example—Cool C buys a gun…From MC Shy D…And shoots Big Daddy Kane.Big Daddy Kane has SUFFERED

as a result of the transaction between Cool C and MC Shy D.

The government DISCOURAGES negative externalities.

Which of the following is an example of a situation that

would cause NEGATIVE externalities?

A.) getting a speeding ticket.

B.) buying lunch at the school cafeteria.

C.) a fight at McEachern high school.

D.) food stamps from the Government.

Which of the following is the best example of a situation that would cause POSITIVE

externalities?A.) a coupon for a free haircut.

B.) the development of new computer software.

C.) the election of a corrupt governor.

D.) the bankruptcy of a newspaper.

The Poverty ThresholdThe Poverty Threshold► The PovertyThe Poverty ThresholdThreshold——

an income level below an income level below that which is needed to that which is needed to support families or support families or households.households.

► In 2011, the line for a In 2011, the line for a single-person household single-person household was was $10,890…$10,890…

► And for a four-person And for a four-person household-household--$22,350.-$22,350.

► Families living below Families living below this threshold usually this threshold usually qualify for…qualify for…

Welfare

• Welfare—government aid for the poor.• The system began under Franklin

Roosevelt during the Great Depression…• And was expanded by Lyndon Johnson in

the 1960s’ War on Poverty.

Types of Welfare: “The Welfare Check”The official name of this program

is “TANF”—Temporary Assistance to Needy Families.

It provides cash aid to families with dependent children.

Critics argue that TANF provides TWO “perverse incentives”…

1. Recipients tend not to take advantage of educational opportunities that might lead to higher-paying jobs…WHY?

2. Recipients might be tempted to have additional children…WHY?

Other Types of Government Aid Food Stamps—most families who are

eligible receive $300-400/month to help purchase food items.

Section 8—the US government currently pays rent to private landlords for approximately 3 million Americans.

Medicaid—provides free or reduced-cost medical coverage to Americans living in poverty.

DO NOT CONFUSE THIS WITH… Medicare—which is NOT a welfare

program… Medicare provides free medical

coverage to ALL Americans over the age of 65.

Social Security is also NOT a welfare program—it is available to ALL Americans, irrespective of income.

Which of the following is NOT example of welfare?

A.) food stamps.B.) medicaid.C.) social security.D.) section 8.