- Theory of social public goods give a rational for the allocation function of the budget policy
- Efficient resource use in public sector.
- Opinion: budget policy is a political matter.
Task
Design a mechanism for the provision of social goods, which in a democratic setting will be both
- Efficient
- Feasible
A. SOCIAL GOODS AND MARKET FAILURE
- Market is efficient in using resources for providing for private goods
- Consumers must bid (reveal their preferences)
- Producers produce it more (max their profits)
HIGHLY IDEALIZED! Reality is different!!!
The market mechanism is not ideal:
- Imperfectly competitive
- Economies of scale
- Consumers lack info, misled by ads
Another problem:
- It cannot provide efficiently with “externalities”
- Situation where consumption benefits are shared and cannot be limited to particular consumers
- Activity causes costs which are **not paid for by the producer nor the consumer **
- Income distribution problem
- Unemployment, inflation, and economic growth
Market for Private Goods
Exclusion principle: A’s consumption is made contingent on A’s paying thep rice, while B, who doesn’t pay, is excluded.
- The market can thus function as an auction system. Consumer bids (reveals preferences) and producer (under competitive pressure) produces more of that good.
- Food, clothing, housing, automobiles, millions of other marketable private goods. - Benefits derived only to those who pay for it.
Market Failure
Happens in two scenarios:
- Consumption is non-rival
- Exclusion is inappropriate and inapplicable
Non-rival Competition scenario
Social goods cannot be excluded (it is inappropriate), because consumption is non-rival.
Non-rival: A’s partaking of the consumption benefits doesn’t reduce the benefits derived by all others. - Available to all without mutual interference.
Efficiency: (microeconomic principles)
In this case, marginal cost (that of admitting an additional user) is zero.
Nonexcludability
…
Combined Causes
B. PROVISION FOR SOCIAL GOODS
Comparison with Private Goods
Budgetary Provision
C. MIXED GOODS
Externalities of Private Goods
External Benefits
External Costs
Bargaining in a Small Group
External Benefits
External Costs
Market Provision of Nonrival Goods
| Degree | What | Drawback |
|---|---|---|
| 1 | Pay according to what the consumer wants to pay | We don’t know how much a consumer is willing to pay. |
| 2 | Two different prices (upto a certain quantity) | |
| 3 |
- The monopolist supplier may then provide the good to various consumers at differentiated prices.
- Efficient outcome: because the price paid equals benefits derived.
Congestion
D. GIVING AS A SOCIAL GOOD
E. MERIT GOODS
The Premise of Individualistic Evaluation
We distinguished between private and social goods: Based on
- Non-rival
- Excludability
But it is the individual’s experience based on utility that differentiates them in day to day affairs.
Thus, each individual can experience whether its a social good or a private good.
- All impact each other’s preferences. E.g. clothing and fashion.
- Do not deny the existence of social interaction in the wants that are experienced individually.
We cannot distinguish in this way: Social goods satisfy more noble aims of life.
Cardinal Utility assumes that the utilities of individuals are independent of each other. BUT IT IS NOT TRUE! Utilities are interdependent.
Altruism also exists, so it’s not that individuals only feel satisfied when their utilities are resolved.
The premise: It is finally the individuals who feel the satisfaction (i.e. A and B) and not some mysterious third party called A+B.
Large scale
- Mixed goods
- Subsidies
- Taxation
Small scale
Externalities of Private Goods
External Benefits
P.49
-
How does the vertical addition of demand work?
-
How does the horizontal addition of demand work?
-
The external benefits should also be considered otherwise the goods will be underproduced.
-
The subsidy can be given to the consumer or the producer.
-
But the problem is, is not known. How do you evaluate the external benefit? So, how much subsidy should I give? Not sure.
- Hence, preference revelation doesn’t happen.
- So, go for revelation through political process. People, if they value the positive externality due to education will vote for those parties which promise to subsidize quality education.
-
Mixed goods should be financed by a mix of private payments and subsidies.
External Costs
P.50
Example: smoking
- The cost of damaging the lungs of a bystander is not “internalized” in the cost of the cigarette.
- Thus, in this case it is overproduced.
- is the external cost. So we should take the total cost
- The government will impose a tax that will cause a reduction (leftward shift) in the supply curve.
- Tax for pollution is Carbon Tax.
Bargaining in the Small Group
- When its a small group then everyone will get involved because the benefit is shared by everyone.
External Benefits
- Countries in
- NATO
- SAARC
- BRICS
Figure 4-4
The small number case.
A : Male B : Female
She decides to purchase nothing, then A purchases , So her benefit (consumer surplus) is . In which case she will not make a purchase because otherwise she will have a benefit of , which is geometrically lesser than .
Similarly for , <Look for the consumer surplus of B>