Summary
Public Sector Economics: Summary
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Summary of the Public Sector Economics Course. In addition to the lectures, the literature is also described in the summary.
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Week 1Organic view of government: this view conceives of society as a natural organism. Each individual is
a part of this organism, and the government can be thought of as its hart
Mechanistic view of government: this view of government is not an organic part of society. Rather, it
is a contrivance created by individuals to better achieve their individual goals.
How to measure the size of the government:
- Number of workers
- Interest payments
- Income transfers
- Purchase of goods and services
Types of government expenditure
- Purchases of goods and services
- Transfers of income
- Interest payments
Welfare economics: branch of economic theory concerned with the social desirability of alternative
economic states.
Edgeworth box: two-dimensional representation of a simple, closed economy consisting of two
individuals and two items (or resources) that are finite in supply
Pareto efficiency in consumption: MRSadam = MRSeve
MRS: the value of the slope of an indifference curve indicates at which an individual is willing to
trade one good for an additional amount of another
MRT: the number of units or amount of a good that must be forgone to create or attain one unit of
another good. So the marginal cost from product x has to be equal to the marginal cost of product y
MRT = MRS
Utility possibilities curve: shows the maximum amount of
utility an individual can gain, given the utility level of the other
level. Points on the curve are Pareto efficient (UU), while
points within the curve are not
W=F(U1,U2)
W= welfare
The first fundamental theorem of welfare economics: given that
producers and consumers are perfect competitors and there is a
,market for every possible good, resources automatically become efficient, without the need for central
control
Market failure
- Monopoly
- Asymmetric information
- Externality
- Public good
Week 2
Excludable: preventing anyone from consuming the good is relatively easy
Nonexcludable: preventing anyone from consuming the good is either very expensive or impossible
Rival: once provided, the additional resource cost of another person consuming the good is positive
Nonrival: once provided, the additional resource cost of another person consuming the good is zero
Private good
Horizontal summation of demand
curves:
the process of creating a market demand
curve by summing the quantities demanded by
each individual at every price
, Public good
Vertical summation of demand curves:
the process of creating an aggregate demand curve for a
public good by adding the prices each individual is willing to pay for
a given quantity of the good
Free rider: the free rider problem is the burden on a shared resource
that is created by its use or overuse by people who aren't paying their
fair share for it or aren't paying anything at all.
Privatization: taking services supplied by government and turning
them over to private sector
Public private mix?
- Relative wage and materials costs
- Administrative costs
- Diversity of tastes
Externalities: an activity on one entity that affects the welfare of another entity in a way that is outside
the market mechanism
- Externalities can be produced by consumers as well as firms
- Externalities are reciprocal in nature
- Externalities can be positive
- Public goods can be viewed as a special kind of externality
MB: marginal benefit
MD: marginal damage
MPC: marginal private costs
MSC: marginal social costs
Coase theorem: provided that transaction costs are negligible, an efficient solution to an externality
problem is achieved as long as someone is assigned property rights, independent of who is assigned
those rights
Assumption:
- The costs to the parties of bargaining are low
- The owners of resources can identify the source of damages to their property and legally
prevent damages
-
How to deal with externalities:
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