ECONOMICS TOPIC 2 LESSON 7

ECONOMICS TOPIC 2 LESSON 7

PUBLIC GOODS

ESSENTIAL QUESTION

Who benefits from the free market economy?

What Makes a Public Good

A public good is a shared good or service for which it would be inefficient or impractical (1) to make consumers pay individually and (2) to exclude those who did not pay.

Public goods are financed by the public sector, the part of the economy that involves the transactions of the government. The private sector, the part of the economy that involves transactions of individuals and businesses, would have little incentive to produce public goods.

Open Ended

Mail delivery is a service government has provided since the earliest days in the nation’s history. Draw Conclusions Why do you think the federal government chose to provide this service rather than letting a private company do it?

Weighing Costs and Benefits

governments step in to act in the public interest when they determine that the benefits of a policy outweigh the drawbacks, or the costs.

Transportation is a vital part of the nation’s infrastructure, the basic facilities that are necessary for a society and economy to function efficiently and grow.

Weighing Costs and Benefits

understanding the costs and benefits is critical in determining whether something gets produced as a public good. Two cost-benefit criteria must be present.

1. The benefit to each individual is less than the cost that each would have to pay if it were provided privately.

2. The total benefits to society are greater than the total cost.

Open Ended

Public goods are created after a cost-benefit analysis like this one. Compare and Contrast Study the fictional event described here. Why was the Capp County bridge built as a public good rather than in the free market?

Multiple Choice

Why has the United States space program been operated as a public good?

• Private enterprise does not have the technical skill needed to build the rockets that carry astronauts into space.

• The profit incentive for a private company to establish and run its own space program is too great.

• The inability of the American space program to land an astronaut on Mars is an example of market failure.

• It is impractical to exclude nonpayers from enjoying the scientific and technological benefits of the space program.

Market Failures

market failure describes a specific situation in which the free market, operating on its own, does not distribute resources efficiently.

MARKET FAILURES

To understand market failure, recall how a successful free market operates: Choices made by individuals determine what goods get made, how they get made, and who consumes the goods. Profit incentives attract producers who, because of competition, provide goods and services that consumers need at prices that are reasonable and responsive to market forces.

Multiple Choice

Define Public goods are examples of market failure, because producing these goods in the free market

• shows that the free enterprise system cannot distribute resources.

• helps entrepreneurs learn how to distribute public resources.

• does not allow for the efficient distribution of resources.

• encourages private businesses to distribute resources efficiently.

Externalities

An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume. Externalities may be either positive or negative.

Positive Externalities

public goods generate benefits to many people, not just those who pay for the goods. Such beneficial side effects are positive externalities. 

Whether private or public, positive externalities allow someone who did not purchase a good to enjoy part of the benefits of that good. 

Negative Externalities

Of course, producing goods and services can also generate unintended costs, called negative externalities. Negative externalities cause part of the cost of producing a good or service to be paid for by someone other than the producer.

Open Ended

Building the Capp County bridge resulted in positive and negative externalities. Analyze Charts Explain how businesses are both helped and hurt by the building of the bridge.

Government’s Goals

First, the government may take action to create positive externalities. Education, for example, benefits students directly. Yet society as a whole also benefits from an educated population, because educated workers are generally more productive.

Government’s Goals

Second, the government aims to limit negative externalities, such as pollution. Pollutants from coal-burning power plants and auto emissions can drift high into the atmosphere and come down in the form of acid rain, which causes ecological damage. 

Government-Driven or Market-Driven Solutions?

many economists think that the private sector can better reduce negative externalities than the government can. This belief has spurred debate over how to stop damage to the environment.

Since the 1970s, the government has often tried to halt pollution by creating strict regulations. Many economists say that this approach is inefficient and limits growth, because it increases costs. It also ties the hands of businesses by requiring specific solutions rather than encouraging innovation.

Multiple Choice

Identify Cause and Effect Which of the following is an example of a positive externality resulting from an outdoor band concert?

• A pair of endangered birds leave their nest in a nearby tree when the concert starts.

• An elderly woman in her apartment hears a song that she liked as a child.

• A pizza parlor closes early, because all of its customers are at the concert.

• A traffic jam occurs as drivers hunt for parking spots near the concert.

The Poverty Problem

There are vast differences between people who have a lot of money, enough money, and very little money. On the average, Americans enjoy a high standard of living. Yet about 15 percent of Americans live in poverty.

The Government’s Role

As a society, we recognize some responsibilities to the very young, the very old, the sick, the poor, and the disabled. The society tries to provide a safety net for people in these groups, in the form of federal, state, and local government programs. These programs aim to raise people’s standard of living, or their level of economic well-being as measured by the ability to purchase goods and services they need and want.

The Government’s Role

To help the poor, government programs take money from some people and redistribute it to others. Yet critics say such actions violate the economic principle of limited government intervention.

While the free market has proven better than any other economic system at generating wealth, that wealth is spread unevenly throughout society.

This leaves some people below the poverty threshold, an income level below that which is needed to support families. 

The Welfare System

Since the 1930s, the main government effort to ease poverty has been to collect taxes from individuals and redistribute some of those funds in the form of welfare. Welfare is a general term for government aid for the poor. It includes many types of programs that redistribute wealth from some people to others.

The Welfare System

Federal welfare programs came under increasing attack in the 1980s. Critics voiced concern about people becoming dependent on welfare and unable or unwilling to get off it. Some critics also claimed that income redistribution discourages productivity, thus actually aggravating poverty.

Poll

How much would you be willing to give up of your 400,000 income to redistribute to the poor?

• 5% (20,000)

• 10% (40,000)

• 20% (80,000)

• 30% (120,000)

• 50% (200,000)

Multiple Choice

Recall The goal of government welfare programs is to

• eliminate the dependence of people on the welfare system.

• maintain a poverty threshold that matches the median income.

• eliminate the income gap between the richest Americans and the poorest.

• raise the standard of living of certain less-fortunate members of society.