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ECO 481: Public Choice Theory

ECO 481: Public Choice Theory. Week 2 - Part I: The Rationale for Government. Dr. Dennis Foster. Market Failure. The Case of Public Goods: Non-excludable & non-rival. Free rider problem. Private markets will “underprovide.” Graphical representation. The Case of Negative Externalities:

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ECO 481: Public Choice Theory

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  1. ECO 481:Public Choice Theory Week 2 - Part I:The Rationale for Government Dr. Dennis Foster

  2. Market Failure The Case of Public Goods: • Non-excludable & non-rival. • Free rider problem. • Private markets will “underprovide.” • Graphical representation. The Case of Negative Externalities: • Free rider problem. • Private markets will “overprovide.” • Graphical representation.

  3. Welfare Economics Sources of market failure: • Market is not exhausting all advantageous trade • Public Good & positive externality. • Negative externalities. • Information problems. • Market instability. Policy prescriptions: • Persuasion/Regulation/Gov’t Expenditure

  4. Rethinking Market Failure The Market Process: • The coordination of activity. • What do people want? • The competing use of scare resources. • How much is right? • The role of prices. • The role of profit & loss. • I, Pencil and Milton Friedman’s version. • Markets need . . . stable legal structure (?)

  5. Assessing Market Failure Public Goods: • How much is right? • The “well balanced” transportation system. • How do you finance? • Free rider is replaced by “forced rider.” • Does that really alleviate this “problem?” • Should any good with MC=0 be provided? • How would the market respond? • Bus vs. cab example.

  6. Assessing Market Failure Imperfect Competition & Information Issues: Monopoly harm . . . to whom? Is there such a thing as “predatory pricing?” Monopoly shortcomings & government. Political response of anti-trust laws. Can we actually have perfect information? Hayek and the market process.

  7. Distribution Issues: • Markets reward contribution, not effort. • Is there an “arbitrary distribution of natural abilities?” • Star Parker - what does gov’t redistribution do? • How many are on food stamps? • Who benefits from food stamps? • Stossel and cotton subsidies.

  8. Market Failure Transaction Costs & Regulation: • Standardizing - weights and measures. • Can’t markets reduce these costs? • Do regulations really reduce these costs? • Stossel video (Institute for Justice) • Coyote blog • Toys • Do businesses like to compete?

  9. ECO 481:Public Choice Theory Week 2 - Part I:The Rationale for Government Dr. Dennis Foster

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