CHAPTER 16
PUBLIC GOODS AND PUBLIC CHOICE
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignments
INTRODUCTION
This chapter compares and contrasts the characteristics of public goods and private goods; it also reviews the
role of government in the optimal provision of public goods. In addition, the characteristics and implications of
LEARNING OUTCOMES
16-1 Differentiate four categories of goods in terms of their exclusivity and rivalry.
Private goods are rival and exclusive, such as a pizza. Public goods are nonrival and nonexclusive, such
16-2 Identify four categories of legislation based on the distribution of costs and the distribution of bene-
fits and provide examples of each.
Public choice based on majority rule usually reflects the preferences of the median voter. Costs and bene-
16-3 Explain why some people want to use government power to increase their income, while others try
to avoid government.
Producers have an abiding interest in any legislation that affects their livelihood. Consumers, however,
purchase thousands of different goods and services and thus have no special interest in legislation affect-
Chapter 16 Public Goods and Public Choice 222
to maximize their political support sometimes serve special interests at the expense of the public interest.
Meanwhile some people resort to the underground economy to avoid government regulations and taxes.
16-4 Outline the differences between government bureaus and for-profit firms.
Bureaus differ from firms in the amount of consumer feedback they receive, in their incentives to mini-
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-4 FOR THE FOLLOWING SECTION
Public Goods
Private Goods, Public Goods, and In Between: Public goods are nonrival in consumption and nonexclusive;
USE POWERPOINT SLIDES 5-7 FOR THE FOLLOWING SECTION
Optimal Provision of Public Goods: The market demand curve equals the vertical sum of each consumer’s
USE POWERPOINT SLIDES 8-10 FOR THE FOLLOWING SECTION
Public Choice in Representative Democracy
Median-Voter Model: Predicts that under certain conditions, the preference of the median, or middle, voter
will dominate other choices.
Special Interest and Rational Ignorance:
• Special Interest: One theory about government behavior holds that elected officials try to maximize
USE POWERPOINT SLIDES 11-14 FOR THE FOLLOWING SECTION
Distribution of Costs and Benefits: Possible combinations of benefits and costs yield four possible categories
of distributions: (1) widespread benefits and widespread costs, (2) concentrated benefits and widespread costs,
(3) widespread benefits and concentrated costs, and (4) concentrated benefits and concentrated costs.
• Traditional public-goods legislation: Widespread benefits and widespread costs (national defense).
USE POWERPOINT SLIDE 15 FOR THE FOLLOWING SECTION
Rent Seeking: Earnings that exceed opportunity cost. An activity that interest groups undertake to secure
special favors from government.
Chapter 16 Public Goods and Public Choice 223
USE POWERPOINT SLIDES 16-17 FOR THE FOLLOWING SECTION
The Underground Economy: All market activity that goes unreported to the government either to avoid taxes
or because the activity is illegal.
USE POWERPOINT SLIDES 18-19 FOR THE FOLLOWING SECTION
Bureaucracy and Representative Democracy: Bureaus are government departments and agencies
charged with implementing legislation; they are financed by appropriations from legislative bodies.
Ownership and Funding of Bureaus: Taxpayers are, in a sense, owners of government bureaus. Unlike a
firm, ownership of a bureau is not transferable. When bureaus earn a “profit,” taxes may decline; when the
CHAPTER SUMMARY
Private goods are rival and exclusive, such as a pizza. Public goods are nonrival and nonexclusive, such as
national defense. Goods that are in between public and private goods include natural monopolies—which are
nonrival but exclusive, such as cable TV—and open-access goods, which are rival but nonexclusive, such as
ocean fish. Because private-sector producers cannot easily exclude nonpayers from consuming a public good,
public goods are typically provided by government, which has the power to enforce tax collections.
The intense interest that producer groups have in relevant legislation, coupled with the rational ignorance of
voters regarding most issues, leaves government vulnerable to rent seeking by special interests. Elected
officials trying to maximize their political support may serve special interests at the expense of the public
interest.
TEACHING POINTS
1. Much of this material will be new to principles students. The first new concepts discussed in this chap-
ter are the problems associated with defining majority rule and the median voter model. A majority vote
2. Students may be surprised to learn that the median voter position is not likely to be the economically
efficient outcome. The reason is that intensities of preferences are not reflected when everyone has an
“equal voice” in the voting outcome.
3. Rational ignorance is often the reason given for poor turnouts on Election Day. The benefits to each
individual voter from voting do not appear to outweigh the cost of voting. One should definitely
use the word appear since this is a matter of perception as some recent elections make clear.
SOLUTIONS TO PROBLEMS APPENDIX
1. (Optimal Provision of Public Goods) Using at least two individual consumers, show how the market
demand curve is derived from individual demand curves (a) for a private good and (b) for a public good.
Once you have derived the market demand curve in each case, introduce a market supply curve and then
show the optimal level of production.
Because private goods are rival in consumption, the market demand for a private good is the horizontal
sum of the individual demand curves of consumers. In the following graph, market demand is the sum of
Chapter 16 Public Goods and Public Choice 225
2. (Private and Public Goods) Distinguish among private goods, natural monopolies, open-access goods,
and public goods. Provide examples of each.
Private goods are rival and exclusive, such as pizza. Public goods are nonrival and nonexclusive, such
as national defense. Because public goods are nonexclusive, they are usually provided by the
Chapter 16 Public Goods and Public Choice 226
3. Types of Legislation) Describe the four different categories of legislation based on the distribution
of costs and benefits and provide examples of each.
Public choice based on majority rule usually reflects the preferences of the median voter. Costs
and benefits of public choices are spread throughout the democracy. The combinations of benefits
4. (Distribution of Costs and Benefits) Suppose that the government decides to guarantee an above-market
price for a good by buying up any surplus at that above-market price. Using a conventional supply-
demand diagram, illustrate the following gains and losses from such a price support:
a. The loss of consumer surplus
b. The gain of producer surplus in the short run
c. The cost of running the government program (assuming no storage costs)
d. What is the total cost of the program to consumers?
e. Are the costs and benefits of the support program widespread or concentrated?
a. When the price is increased from P* to P, the consumer surplus that is lost equals P*abP.
5. (Median-Voter Model) In a single-issue majority vote, such as the TV example in this chapter, does the
median voter always get his or her most preferred outcome?
In the TV example, the decision is made by voting on two alternatives at a time and then pairing the
Chapter 16 Public Goods and Public Choice 227
6. (Representative Democracy) Major political parties typically offer “middle-of-the-road” platforms rather
than take extreme positions. Is this consistent with the concepts of the median voter and rational
ignorance discussed in this chapter?
The median voters’ preference often dominates other choices. Therefore, political parties cater to the
7. (Seeking vs. Avoiding Government) Explain how rent seeking can lead to a drop in production of goods
and services. What role might the underground economy play in lessening the drop in productive
activities?
Resources used up in rent-seeking activities are not available for productive activities—so production
8. (Rent Seeking) Explain how rent seeking can lead to a drop in production of goods and services.
What role might the underground economy play in lessening the drop in productive activities?
Elected officials trying to maximize their political support sometimes serve special interests at the
9. (Bureaucracy and Representative Democracy) How do the incentives and feedback for government
bureaus differ from those for profit-making firms?
Ownership in a firm is easily transferable through market transactions; ownership in a government
bureau (by the taxpayers) is not transferable. A taxpayer must move or die to surrender ownership.
10. (Bureaucracy and Representative Government) A firm is described as combining managerial
coordination with market exchange in order to produce its good or service. Does similar behavior occur
in government bureaus? Explain.
Elected officials may choose to provide some public output through government bureaucracies and some
public output by contracting with private firms. When using bureaus, the government is supplying the
Chapter 16 Public Goods and Public Choice 228
Experiential Assignments
1. Loren Lomasky, in “The Booth and Consequences” at http://perspicuity.net/sd/tbac.html, wrestles with
the question of why people bother to vote. Have students read the article and decide for themselves if vot-
ing is rational.
2. “The Politics & Policy” column in the Wall Street Journal is a good source for articles on politics at
3. The federal budget revenues and expenditures are detailed at http://www.whitehouse.gov/omb/budget.