Public and Private Goods- Micro Topic 6.3

Summary

In this video, Mr. Clifford introduces the concept of public goods, exploring the debate sparked by President Obama's statement on infrastructure. He examines both sides of the argument, explaining that while firms did not directly produce roads and public services, capitalism enables the taxes that fund them. Public goods, defined by non-exclusion and shared consumption, present challenges for the free market due to the free rider problem. Mr. Clifford uses examples like national defense and public education to explain how the government plays a crucial role in providing these goods that benefit society without profit incentive.

Takeaways

• 😀 Public goods are defined by two main characteristics: non-exclusion and shared consumption.
• 😀 Non-exclusion means people who don't pay taxes can't be excluded from enjoying the benefits of public goods (e.g., free public education).
• 😀 Shared consumption (non-rivalry) means one person's use of a public good doesn't prevent others from using it (e.g., national defense).
• 😀 The free market doesn't produce public goods because they lack profit potential, due to the free rider problem.
• 😀 The free rider problem arises when people enjoy benefits without paying, leading to underproduction of public goods.
• 😀 Even hardcore libertarians recognize the importance of government-provided services like national defense and maintaining order.
• 😀 The debate between Democrats and Republicans on public goods revolves around whether the government should provide them and how much tax revenue it should collect.
• 😀 President Obama's statement on public goods was highly controversial but emphasizes the role of government in providing infrastructure like roads and bridges.
• 😀 Republicans argue that businesses and individuals contribute to the creation of public goods, particularly through taxes.
• 😀 The key question in public goods debate is not whether the government should do everything, but how much it should tax and which public services to provide.
• 😀 Public goods examples include national defense, street lights, and public parks, which benefit everyone, regardless of their contribution.

Q & A

What is the controversial statement mentioned by President Obama during an election year?

The controversial statement refers to President Obama's remark that if you have a business, 'you didn't build that; somebody else made that happen,' referring to the infrastructure like roads and bridges that helped businesses operate.

What are the two main sides of the debate around the statement 'you didn't build that'?

The Democrats, supporting President Obama, argue that businesses did not build the public goods like roads and bridges, while Republicans counter that businesses were built by individuals, and the government is taking their money to fund these goods.

What is the role of the free market in providing public goods?

The free market plays a role in generating the tax revenue necessary for funding public goods, such as roads and hospitals. However, the market doesn't produce these goods directly, because there is no profit in providing public goods.

What is the key distinction between public goods and private goods?

Public goods are characterized by non-exclusion (everyone can enjoy the benefits, even if they don't pay) and shared consumption (one person's use doesn't reduce availability for others). In contrast, private goods are both excludable and rivalrous, meaning people can be excluded from using them, and one person’s use can diminish availability for others.

What does the term 'free rider problem' refer to in economics?

The 'free rider problem' occurs when individuals can benefit from a public good without paying for it. This happens because people cannot be excluded from using the good, so they have an incentive to enjoy it without contributing to its cost.

Can you give an example of a public good that benefits everyone, regardless of their participation in funding?

An example of a public good is free public education. Even people who do not pay taxes or who are not citizens can still access public education.

What is the concept of shared consumption or non-rivalry in public goods?

Shared consumption, or non-rivalry, means that one person’s use of a public good does not reduce its availability for others. For example, using national defense does not diminish its availability to others.

Why won't the free market produce public goods like lamp posts for everyone?

The free market won't produce public goods like lamp posts because there is no profit in it. Since the goods are non-excludable, firms can’t charge people directly for using them, leading to a lack of incentives to provide them.

Why are libertarians unique in their stance on public goods?

Libertarians generally oppose government involvement in providing public goods, preferring minimal or no government intervention. However, even libertarians recognize the importance of national defense and the role of government in maintaining order.

What are the key questions when debating the role of government in public goods?

The central question is not whether the government should provide public goods but rather how much tax revenue it should collect and which goods and services it should provide to the public.