ECO 481:Public Choice Theory

Week 5 – Part I:Week 5 – Part I:

Free & Forced Riders,Free & Forced Riders,

Dr. Dennis Foster

The Supply ProblemThe Supply Problem • We can “imagine” the optimal level.• There still will be free riding.

pri. benefits

costs

Quantity

$

pub. benefits

• So, what is Q2?• So, how do you

decide on payment?• Tax can’t be equal

can it?• Do we know

“willingness to pay?”. Q1 Q2

The Supply ProblemThe Supply Problem • In market, we adjust Q to make MB=MC.• There are very few purely public goods.• Markets try to transform in quasi-private goods.

– TV, radio, fenced in rangeland.

• Political determination of differing preferences.• Nobody gets what they want!• Probably lessens WTP.

• “If everyone is unhappy…”

The Supply ProblemThe Supply Problem

Too much or too little?Too much or too little?• If benefits are long-run, under provide.• If costs are long-run, over provide.• If public accepts “publicness” and financing tied

to production, outcome is likely close to “optimal.”

• Producers of public good biased towards too much.

– Pentagon example– Schools and bus systems– Goldwater report.

PrivatizingPrivatizing • Road pricing in Hong Kong.

– Singapore & London.

• Private roads- Stossel video• Private parks?

– Meteor Crater, Mt. Vernon, Grand Canyon Caverns.

• Education - vouchers as start.

• “Merit goods?”– Flagstaff: “amenities.”

Final Thought – The bankrupt city (Stockton)

ECO 481:Public Choice Theory

Week 5 – Part II: Week 5 – Part II: PrivatePrivate

PropertyProperty

Dr. Dennis Foster

What are property What are property rights?rights?

• Attributes of economic goods– A “bundle of rights.”

• A set of behavioral rules.– Defined– Defendable– Divestible

• A human right (!)– Alchian

The case of Kuapa Pond.

Property typesProperty types

• Open access common property– First come, first served.– Tragedy of the Commons

• Common property– Limited set of owners!– “Common-pool resources” & Ostrom

• Fisheries, grazing land, elephants.

• Private property– Coase Theorem, how to deal with externalities– ““Without property rights, there are only two solutions to Without property rights, there are only two solutions to

conflict over scarce resources: violence or politics.”conflict over scarce resources: violence or politics.”

Establishment of rightsEstablishment of rights

• Natural rights– Locke, rights pre-date government.

• Role of gov’t. is to protect these rights.

– Ryan & rights

• Utility-based– Government regulations … taxing, banning, controlling

• AZ sales tax, kidney sales, eminent domain• Kelo v. New London (video); AZ case• Wetlands (Stossel video; 7 min. mark)• “Rent extraction” as ultimate threat.

ECO 481:Public Choice Theory

Week 5:Week 5:

– Part I: Free & Forced Riders – Part I: Free & Forced Riders

Part II: Private PropertyPart II: Private Property

Dr. Dennis Foster