Topic 9: Government & Environment

Topic 9: Government & Environment A. Government Role: Law and Order B. Government Role: Income Redistribution C. Government Role: Market Failure D. Market Failure Example: Environmental Economics

A. Government Role – Law and Order Modern economies only operate and grow if PROPERTY RIGHTS are guaranteed: • People need to be able to own property • People need to be able to earn income to purchase property, and be able to sell property • Property ownership needs to be guaranteed from external threats

A. Law and Order If NOTHING ELSE, the government is responsible to ensure Property Rights through: • A legal system • Allowing for ownership of property, buying and selling • To enforce these laws with appropriate punishments • A police force • To protect property ownership and support the legal system

A. Law and Order 3) A military • To protect local property owners from outside interference Even if the economy runs “perfectly”, a government is still needed.

B. Government Role – Income Redistribution Governments are often required to balance EFFICIENCY and EQUITY Efficiency – society’s resources are used to produce the maximum amount of goods (that people want) Equity – society’s output is divided “fairly” • Fairly could be interpreted as: • Equally • According to need • According to effort

B. Income Redistribution Governments have a variety of programs that seek to enhance equity (often at the cost of efficiency): • Unemployment Insurance • GST credit, Child Tax Benefit, and other Welfare Programs • Pensions • Subsidized Healthcare • Subsidized Educations • And others…

B. Income Redistribution Although income redistribution often reduces efficiency, it benefits society for a variety of reasons: • Insurance • Many of these programs act as large-scale income insurance • Premiums (taxes) are paid now • Benefits are paid out if your income drops (due to unemployment, illness, triplets, failed retirement investments, etc.

B. Income Redistribution 2) Altruism • People feel good when they help others who need help • It is costly and difficult to identify those who need help and give the help they need • The government can often offer help on a larger scale and more efficiently than individuals

B. Income Redistribution 3) Fairness • Many people value fairness • Everyone should be on an equal playing field • It is simple chance if someone is born into a rich family or a poor family; if someone develops diabetes; if one of two identical workers lose their jobs • Income redistribution aims to enhance fairness

B. Income Redistribution 4) Social Stability • High income differences lead to social instability, causing inefficiency and (in extreme cases) revolution • The poor resent the rich, and have an incentive to be less productive or destructive to achieve “fairness” • The rich fear the angry poor, and (mis)allocate resources to security and policing

C. Government Role – Market Failure IF A market is a perfectly competitive (in buyers and sellers) THEN The market maximizes efficiency THEREFORE The government should NOT intervene

C. Market Failure BUT Markets are often NOT Perfectly Competitive; there is often Market Failure: • Market Power • Public Goods • Asymmetric Information • Externalities

C.1 Market Power If a firm has some degree of market power, there is not perfect competition (ie: Monopolies, Oligopolies, Monopolistic Competition). In these cases, government intervention could be required (topic 5b): • Merger Prevention • False Advertising Prevention • Predatory Pricing Prevention • Bait and Switch Prevention • Price and Output controls, etc.

C.2 Public Goods • A PRIVATE GOOD has two features: • Rival – once consumed, another person cannot consume it • Excludable – others can be prevented from consuming it • Food (ie: pizza or sushi) is a good example of a private good. Once I eat it, it’s gone and you’re left hungry.

C.2 Public Goods • A PURE PUBLIC GOOD has two features: • Nonrival – once provided, another person can consume it at no additional cost • Nonexcludable – once provided, it is impossible or highly expensive to prevent anyone from consuming it

C.2 Public Goods • National Defense is a good example of a pure public good: • Nonrival – all Canadians benefit • Nonexcludable – it’s impossible to prevent a Canadian from benefitting • Other examples: Conventional Radio, A Beautiful View, A Canada-Wide Sunglass dome designed to block harmful sun rays (Canadome)

C.2 Public Goods • An IMPURE PUBLIC GOOD is either: • Nonrival – (examples – a public pool, a gated national park, an art gallery) • or • 2) Nonexcludable – (examples: fish in a lake, wildlife, my office hours) • To some extent

C.2 Public Goods • Pure Public Goods (and many Impure Public Goods) should be provided by the government through: • Government production • Government provision (and private production) • Due to: • Scale constraints • The Free Rider Problem

C.2 Public Goods – Scale Constraints • Many public goods are large projects that would require too many individuals to work together to produce. • (examples: Rocky Mountain National Park, TransCanada highway) • The government has the size required to pool resources for these projects

C.2 Public Goods – Free Rider Problem If a public good is provided privately, its efficiency depend on how people represent their willingness to pay -For private goods, people have no incentive to misrepresent their willingness to pay -if the price is $10, and that lies in their willingness to pay, they will pay the $10, consume the good and be happy

C.2 Public Goods – Free Rider Problem -For public goods, people have an incentive to misrepresent their willingness to pay -if the price is $10, a person could: a) hope someone else pays the price, then they get to enjoy it b) Claim their willingness to pay is lower (ie: $2), then enjoy it when others pay the difference =>they are a FREE RIDER

C.2 Free Rider Examples • At an alligator reserve, people can pay money to throw meat into the water to feed the alligators. Many people wait for someone else to buy and throw the meat. • If a community shares a park, residents may wait for someone else to mow the lawn/pick up waste before they use it. • Your roommate may claim (s)he’s not interested in cable TV/Pizza, then after you buy it they watch/eat.

C.2 Public Goods – Free Rider Problem • When the government provides Public Goods: • Everyone is taxed (forced to pay) • Everyone can benefit • The free rider problem is avoided.

Efficient Provision of PUBLIC GOODS -Consider Maka and Susan’s individual demands for a public good: Youtube -Youtube shows are nonrival and nonexcludable; one person’s consumption doesn’t affect anothers’ -The key difference in a public good is that BOTH can consume a purchased good; it is not used up -This results in a VERTICAL SUMMATION to calculate willingness to pay

Efficient Provision of Public Goods: Market demand Maka Susan P P P 11 10 7 4 Q Q Q 2 2 2 Maka is willing to pay $4 each for 2 youtube shows, and Susan is willing to pay $7 each, therefore the market is willing to pay $11 each

Efficient Provision of Public Goods: Market demand Maka Susan P P P S 11 10 7 6 4 4 2 Q Q Q 2 3 2 3 3 The market Supply gives an equilibrium quantity of 3. Here price paid in the market ($6) is the sum of Maka’s payment ($2) and Susan’s payment ($4).

Efficient Provision of Public Goods • Public goods should therefore be provided until the point where the marginal cost of the good is equal to the sum of marginal benefits

Topic 9: Government & Environment