Chapter 30  Public Goods Help When Markets Fail

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I. Private and Public Goods       II. Externalities      III. Democracy and Economic Efficiency     IV. Cost-Benefit Analysis and Government Regulation    

 V. Managing Entitlements      VI. Has Helping the Unemployed Worked   VIII. Is College Financial Aid Welfare?

IX. Political Economy Issues related Videos        X. Political Controversies
 

I. Private and Public Goods
    
A. Private good
        1. Rivalries- only those who will to buy a good can have the benefit
        2. Exclusive- bought by person A, not available to person B
        3. Private goods satisfies an individual want while public good satisfies a collective wants.
    B. Public good is a good that is non-rivalries and non-excludable
    C. Public Choice by W. F. Shughart II of the Library of Economics and Liberty
    D. Demand for public goods
         1. Demand for public goods is difficult to determine. 
              a. Once provided, everyone may use them. 
         
 
    b. The absence of a price mechanism to provide the rationing
                  function means politicians must decide which goods to produce.
         2. Determining which goods to produce using cost-benefit analysis is difficult.
             a
. Many costs (MC) are difficult to predict and measure.
             b. Many benefits (MB) are subjective and difficult to measure.
         3. Public-choice-theory-and-the-politics-of-instant-gratification
             9/16/12 econintersect
         4. Our Miss-measured Economy
     E. Cost  Benefit Analysis compare marginal cost with marginal benefit. from Thayer Watkins of San Jose State
    
F. Eisenhower right,  the military industrial complex a real threat

Many Agree With This
Very Old Statement! 

 
 

Comedian Groucho Marx

 

II. Externalities
     A. Externalities are costs or benefits not accounted for in the price of a product
         that accrue to those outside or external to the market place.
     B. Please review Part IV of  6) Government's Economic Functions for an 
         analysis of government action to decrease externality costs and increase
         externality benefits
     C. Econ Concepts in 60 Seconds Video on Negative Externalities (Spillover Costs)
     D. Coase's Theorem
         1. Analysis by Ronald Coase revealed that government should not get involved
             with disputes over externality costs when property ownership is well-defined
             and the number of people involved is small. 
          2. He demonstrated that individual maximizing behavior would correct these problems. 
          3. The government should only be involved when the number of participants is so large
              as to make bargaining costs prohibitive.
          4. For example, the government should not get involved in a noise pollution problem
              near an amusement park because of the small number of people involved but 
              should get involved with acid rain generated in the Midwest and falling into New
              England because of the large number of people involved.
          5. See
              a.  The World According to Coase,
             
b.  Illustration of the Coase Theorem
              c.  Orange Blossom Special: Externalities and the Coase Theorem
              d. Externalities-- The Lives of Others: Pigouvian Taxes 8/19/17
         What to do when the interests of individuals and society do not coincide?

        
  6. Coase theorem - from Wikipedia has additional information.
     E. Solving the pollution problem Orange Blossom Special: Externalities and Coase Theorem
         1. The market solution
             a. First, taking into account diminishing returns, calculate the economically
                 tolerable level of pollution acceptable to society. This can be done by 
                 comparing the marginal costs to society of  pollution (supply), which 
                 increases with more anti-pollution spending, with the marginal gain to
                 society of a clean environment (demand), which decreases with
                 additional spending.
              b. The resulting quantity of acceptable pollution would be fixed and sold 
                  as "rights" to pollute.
              c. Industrialization causes an increase in the demand to pollute and with a
                  fixed supply, the costs of rights to pollute would increase.
              d. Those who want goods that pollute would simply have to pay!
         2. Other solutions
             a. Taxes and subsidies
             b. Regulation
             c. Moral suasion         
         3. For more insight into tradable rights read Trading the Earth,
              the politics behind tradable pollution rights by Sharon Beder.
   
 F. Using liability rules and lawsuits to eliminate externality costs.
         1. Laws and a damage recovery system exist.
         2. Cost, time delays and uncertainty as to outcome hamper this method.

history-of-us-taxes

MCS is marginal cost to society

MGS is marginal gain to society

MRPP is marginal revenue product of pollution

               Measures of Pollution

Pollution from economic activity

III. Democracy and economic efficiency
     
A. Majority rule is often inefficient
         1. A slight majority of people may vote less public spending in an area
             because their perceived benefit is slightly below the good's average
             cost they would pay as a taxpayer.
         2. Those voting for the activity (the minority) would receive a benefit
             substantially greater than the average costs. 
         3. As a result society does not invest in something with a positive total return. 
         4. An example would be people who feel spending on education is not 
             beneficial and vote for less spending in spite of the substantial benefit 
             received by children. 
         5. The public good is voted less money even though total benefit exceeds
             total cost.
     B. Rent-seekers are people attempting to use public policy to secure economic
         rent (Sr)
 for themselves at the expense of consumer surplus (Sc) received
         in the marketplace and in some cases, the public interest.

 

    C. Special interest groups are composed of a few people with much to gain 
         from a political outcome. 
         1. Through political efforts they foster desired results at the expense of the 
              many who acquiesce because individually they have little to lose. 
         2. These groups often form Political Action Committees (PACs) to lobby
             on their behalf.
     D.
Logrolling - wiki is trading votes and influence for projects which are not
          of interest in return for votes and influence for projects which are of interest
     E. No Country for Young People
examines wage policies affect on younger
          workers.
     F.
Trump vs. the Regulatory State Robert Samuelson, Washington Post

Image result for majority rule cartoons

 

 

 

 

 

 

 

 

 

SC is surplus going to consumers 

SL is surplus lost

SR is surplus going to rent-seeker

IV. Cost-Benefit Analysis and Government Regulation  

  Read Grandfather Government Regulation Cost Report - by MWHodges for a conservative view. Liberal view is hard to find.

Regulation1

Annual Deaths Per 100,000 Exposed

Cost Per Life Saved

Mandatory seat belts

9.1

$390,000

Prohibit alcohol and drug use by railroad workers

.2

$650,000

Control and disposal standards for benzene

2.1

$4,000,000

Disposal standards for uranium waste

43.0

$69,000,000

Restrictions on worker exposure to asbestos

6.7

$117,000,000

.1"Bringing Reason To Regulation," Louis S. Richman,
Fortune
, October 19, 1992


V. Managing Entitlements

Summary Definition Who Benefits from Most to Least Problems

Concerns

Medicare Subsidized healthcare
for the elderly
All benefit are the same, high income earners pay most Required additional health care cost difficult for many

Longer life especially for poor people who now also have subsidized health care will increases cost. Free cases poorer health. Solutions, later eligibility, less coverage, higher deductibles currently not acceptable to electorate.

Social Security Retirement income, partial at 62, max at 70, Low income earners receive ha higher investment return, some receive death and spousal benefits See  Table 1 and  Table 3 Deficit concerns until baby boomers die, retirement age raised or young people vote.
SS Benefits are 100% Secure bur their real value depends on economic success..
Solution just time or later retirement but politicians will not act until forced by electorate Increased negative cash flow should add political pressure.
Tax Expenditures Legal deductions and exemptions from income decrease tax collections Employee sponsored health insurance,401K, long-term capital imputed rental income, mortgage interest, earned income tax credits, deferred income from controlled foreign corporations Table 2 Tax payers don't appreciate
 their benefit (entitlements?)
Solution of decreasing them by a third is unacceptable to electorate though this would have increase tax collections $400 billion in 2015 when the deficit was $439 billion.

 

Source: Entitlements Require Political Action

  VI. Has Helping the Unemployed Worked
     
 

The War on Work—and How to End It
 

"Unfortunately, policymakers seem intent on making the joblessness crisis worse. The past decade or so has seen a resurgent progressive focus on inequality—and little concern among progressives about the downsides of discouraging work. Advocates of a $15 minimum hourly wage, for example, don’t seem to mind, or believe, that such policies deter firms from hiring less skilled workers. The University of California–San Diego’s Jeffrey Clemens examined states where higher federal minimum wages raised the effective state-level minimum wage during the last decade. He found that the higher minimum “reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points,” which accounted for “43 percent of the sustained, 13 percentage point decline in this skill group’s employment rate.”

The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil. Economists Andrew Clark and Andrew Oswald have documented the huge drop in happiness associated with unemployment—about ten times larger than that associated with a reduction in earnings from the $50,000–$75,000 range to the $35,000–$50,000 bracket. One recent study estimated that unemployment leads to 45,000 suicides worldwide annually. Jobless husbands have a 50 percent higher divorce rate than employed husbands. The impact of lower income on suicide and divorce is much smaller. The negative effects of unemployment are magnified because it so often becomes a semipermanent state.

Time-use studies help us understand why the unemployed are so miserable. Jobless men don’t do a lot more socializing; they don’t spend much more time with their kids. They do spend an extra 100 minutes daily watching television, and they sleep more. The jobless also are more likely to use illegal drugs. While fewer than 10 percent of full-time workers have used an illegal substance in any given week, 18 percent of the unemployed have done drugs in the last seven days, according to a 2013 study by Alejandro Badel and Brian Greaney.

 

Joblessness and disability are also particularly associated with America’s deadly opioid epidemic.David Cutler and  I examined the rise in opioid deaths between 1992 and 2012. The strongest correlate of those deaths is the share of the population on disability. That connection suggests a combination of the direct influence of being disabled, which generates a demand for painkillers; the availability of the drugs through the health-care system; and the psychological misery of having no economic future.

Increasing the benefits received by nonemployed persons may make their lives easier in a material sense but won’t help reattach them to the labor force. It won’t give them the sense of pride that comes from economic independence. It won’t give them the reassuring social interactions that come from workplace relationships. When societies sacrifice employment for a notion of income equality, they make the wrong choice.

Politicians, when they do focus on long-term unemployment, too often advance poorly targeted solutions, such as faster growth, more infrastructure investment, and less trade. More robust GDP growth is always a worthy aim, but it seems unlikely to get the chronically jobless back to work. The booms of the 1990s and early 2000s never came close to restoring the high employment rates last seen in the 1970s. Between 1976 and 2015, Nevada’s GDP grew the most and Michigan’s GDP grew the least among American states. Yet the two states had almost identical rises in the share of jobless prime-age men.

Infrastructure spending similarly seems poorly targeted to ease the problem. Contemporary infrastructure projects rely on skilled workers, typically with wages exceeding $25 per hour; most of today’s jobless lack such skills. Further, the current employment in highway, street, and bridge construction in the U.S. is only 316,000. Even if this number rose by 50 percent, it would still mean only a small reduction in the millions of jobless Americans. And the nation needs infrastructure most in areas with the highest population density; joblessness is most common outside metropolitan America. (See “If You Build It . . .,” Summer 2016.)

Finally, while it’s possible that the rise of American joblessness would have been slower if the U.S. had weaker trade ties to lower-wage countries like Mexico and China, American manufacturers have already adapted to a globalized world by mechanizing and outsourcing. We have little reason to be confident that restrictions on trade would bring the old jobs back. Trade wars would have an economic price, too. American exporters would cut back hiring. The cost of imported manufactured goods would rise, and U.S. consumers would pay more, in exchange for—at best—uncertain employment gains.

The techno-futurist narrative holds that machines will displace most workers, eventually. Social peace will be maintained only if the armies of the jobless are kept quiet with generous universal-income payments. This vision recalls John Maynard Keynes’s 1930 essay “Economic Possibilities for Our Grandchildren,” which predicts a future world of leisure, in which his grandchildren would be able to satisfy their basic needs with a few hours of labor and then spend the rest of their waking hours edifying themselves with culture and fun.

But for many of us, technological progress has led to longer work hours, not playtime. Entrepreneurs conjured more products that generated more earnings. Almost no Americans today would be happy with the lifestyle of their ancestors in 1930. For many, work also became not only more remunerative but more interesting. No Pennsylvania miner was likely to show up for extra hours (without extra pay) voluntarily. Google employees do it all the time.

Joblessness is not foreordained, because entrepreneurs can always dream up new ways of making labor productive. Ten years ago, millions of Americans wanted inexpensive car service. Uber showed how underemployed workers could earn something providing that service. Prosperous, time-short Americans are desperate for a host of other services—they want not only drivers but also cooks for their dinners and nurses for their elderly parents and much more. There is no shortage of demand for the right kinds of labor, and entrepreneurial insight could multiply the number of new tasks that could be performed by the currently out-of-work. Yet over the last 30 years, entrepreneurial talent has focused far more on delivering new tools for the skilled than on employment for the unlucky. Whereas Henry Ford employed hundreds of thousands of Americans without college degrees, Mark Zuckerberg primarily hires highly educated programmers."

Unnfortunately, policymakers seem intent on making the joblessness crisis worse.

Little concern among progressives about the downsides of discouraging work.

Jeffrey Clemens increase state-level minimum wage during the last decade.
 “reduced employment among individuals ages 16 to 30 with less than
a high school education by 5.6 percentage points,”  which accounted for
“43 percent of the sustained, 13 percentage point decline in this skill group’s employment rate.”

 

"huge drop in happiness associated with unemployment—about ten times larger than that associated with a reduction in earnings from the $50,000–$75,000 range to the $35,000–$50,000 bracket.

One recent study estimated that unemployment leads to 45,000 suicides worldwide annually. Jobless husbands have a 50 percent higher divorce rate than employed husbands. The impact of lower income on suicide and divorce is much smaller. The negative effects of unemployment are magnified because it so often becomes a semipermanent state."

Increasing the benefits received by nonemployed persons may make their lives easier in a material sense but won’t help reattach them to the labor force Joblessness and disability are also particularly associated with America’s deadly opioid epidemic.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VII. Sundry Materials
      A.
Everyone Is On Welfare
      B.
Boondoggle
name given to government projects early
        in FDR's presidency to describe wastefulness.
      C.
Outsourcing Government Services is  About Looting
      D.
Improving Public Policy Through Behavioral Economics
     
E.
How Income Inequality Is Affected by Labor Share

 

 
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