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20090909-Policy_Concepts - So our groundwork So our...

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Unformatted text preview: So, our groundwork So, our groundwork has been laid! Characteristics of policy and policy problems Where and by whom policy is made Policy agendas and how they evolve Using the Scientific Method to analyze policy problems Now its your time to practice using the Scientific Method in your short policy papers! Now we need to get out Now we need to get out teeth into some very important concepts: These concepts are fundamental to all policy problems and need to be fully grasped before we can effectively function in the policy arena Fundamental Policy Concepts: Fundamental Policy Concepts: The concept of a “public” good The concept of “risk” When do governments need to intervene in free markets? What risks do governments need to protect the people from? The concept of “cost­benefit” How doe government decide if policies and programs are efficient? Policy Analysis Concepts: Policy Analysis Concepts: Public Goods What sort of goods and What sort of goods and services do governments provide? Employment in Federal, State, and Local Employment Government education health and hospitals national defense police protection postal services highways judicial and legal 8.4mill 1.9 0.9 0.9 0.8 0.6 0.4 45% 10 5 5 4 3 2 Employment in Federal, State, and Employment Local Government parks and recreation fire protection sanitation, sewage all other Total 0.4mill 0.3 0.2 4.0 18.8mill 2% 2 1 21 100% Some of these goods and services Some of these goods and services are also offered on the free market: Education Health/hospitals Police protection Postal services Toll roads/private access roads Parks and recreational facilities Why can’t the free market simply provide these goods? Wouldn’t that be more efficient? Why does government get involved in these markets? Why do we need government intervention in a free market society? Consider this, economic theory tells us that …… Free markets will provide... Free markets will provide... and allocate goods and services most efficiently in any society Free markets……. Free markets……. Provide and distribute goods and services better than any other market mechanism and are perfectly “efficient” if: Sellers are unconstrained in their selling activity Buyers are unconstrained in their choice of market goods Buyers and sellers exchange “values” according to their preferences and profit maximizing prices How do we describe this efficiency? How do we describe this efficiency? Criterion used to judge the efficiency of market functioning is that of pareto optimality The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution. Pareto Optimality Pareto Optimality Given a set of alternative allocations and a set of individuals, an allocation is Pareto optimal if it is impossible to better someone’s condition without simultaneously worsening another’s via reallocation Pareto Optimality Pareto Optimality Arises through voluntary actions of producers and consumers without any need for government intervention Free Markets & Public Policy Free Markets & Public Policy It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies. Assuring Pareto Optimality Assuring Pareto Optimality Through Free Markets. . . Competition among buyers assures that goods and services will be allocated in conformity with the relative desires and abilities of the participants to pay If all assumptions hold, then a freely competitive economy should provide optimal resource allocation Government should then only be in the business of income distribution/redistribution since competition would allow the system to be efficient Why then do free Why then do free markets fail to provide some goods and services? Because…. 1.. 1 Many of the assumptions of economic theory do not hold in the real world 2. Not all products can be owned exclusively, i.e., they have public goods characteristics 1. Violation of Assumptions 1. Violation of Assumptions A. Full Information A. Full Information Producers and consumers possess full information regarding market exchanges Producers: Consumers: Cost of production Preferences MC = MR Resources Willingness to sell Willingness to buy B. No Monopoly Power B. No Monopoly Power No one seller controlling the market exchange process and reducing competitive forces in the market Producers: Many producers Differentiated products No collusion or price fixing Free to meet differentiated consumer needs No Monopoly Power No Monopoly Power •Natural monopolies occur when the fixed costs of producing a good are high relative to the variable costs so that the average cost of production declines over the relative range of demand •e.g., electricity supply, sewage, Time Warner Cable. •It can also occur as a result of technology development and exclusive capital, e.g., R&D and patent rights C. No Externalities C. No Externalities Effects upon persons not associated with specific purchases or consumption activities Externality Externality Any valued impact (positive or negative) resulting from any action (whether related to production or consumption) that affects someone who did not fully consent to it through participation in a voluntary exchange Types of Externalities Types of Externalities Negative: Types of Externalities Types of Externalities Positive 2. Public Goods 2. Public Goods Property Rights Property Rights Free markets function on the assumption that the purchase of goods and services comes with ownership rights (property rights) which provide an incentive to purchase/own Public Goods Public Goods Good or service having two characteristics: nonrivalry in consumption nonexcludability Nonrivalry Nonrivalry Means that more consumption of a good by one person does not mean less consumption of it by another person­­there is a collective aspect to the good and everyone can consume more of it if they want. Are Public Are Public Goods Always Non­rival? Public goods and Public goods and “congestion” A public good is “congestible” if the marginal social benefit of consumption can become negative after some point Nonexcludability Nonexcludability Means that it’s impossible to exclude people from consuming the good Examples of Nonexcludability Examples of Nonexcludability Public goods undermine Public goods undermine market mechanisms….. Nobody can “own” a public good since there are no property or ownership rights to the good or service – so producers have no incentive to produce nor consumers to buy Public goods undermine Public goods undermine market mechanisms….. Nobody can be prevented from benefiting from the good since no exclusive rights to ownership exist and people can enjoy the benefits without paying Public Goods Public Goods Result in no incentive for ownership because of a problem called “free riding” The Free Rider Problem The Because there is always more of a public good, you can’t exclude people, and some people can enjoy the benefits without reducing the enjoyment of others and without paying The Free Rider Problem The The larger the group the more severe the free rider problem will be and the less likely it will be that private markets will effectively provide the good or service by private contributions So, we conclude…. So, we conclude…. For PRIVATE goods For Free markets ensure “near” efficient allocation. For PUBLIC goods For Markets are often absent or inefficient, resulting in: ­ Under provision (quality and quantity) ­ Potential collapse of the entire provision system And, governments are more likely to intervene Lets look at an Lets look at an example…. So, now we understand why… So, now we understand why… Governments provide BOTH public and private goods/services in markets where assumptions of economic theory are violated or goods/services have public goods characteristics Do private markets provide Do private markets provide any public goods at all? Private Provision of Private Provision of Public Goods Donations to private charities Volunteer work Buying environmentally­friendly products The same problem… The same problem… Under provision of cancer/AIDS research funds Under provision of clean air Under provision of global wildlife habitat and species diversity What about externalities? What about externalities? Government solutions to the problem of free market product/service externalities Solutions to Negative Solutions to Negative Externalities Solution by action: direct provision Local law enforcement Prohibition: prohibit the action Drugs, gambling Command and Control: laws and fines Traffic fines Voluntary actions: negotiation, mergers Emission standards Solutions to Negative Solutions to Negative Externalities Regulations: setting the rules Solution by payment: incentive provision Sales control on alcohol and tobacco Grants (matching) for pollution cleanup Taxes and subsidies: classic intervention Tax polluters, subsidize investment in cleanup efforts Taxes – a difficult solution….. Taxes – a difficult solution….. Why? Unobservable consumer preferences, endowments, and behavior Therefore, government often lacks relevant information to be able to tax appropriately to discourage (encourage) behavior Tax solution for the provision of a public good: A numerical example The Smith­Jones The Smith­Jones “Water Well” Example $100 Well for Jones & Smith $100 Well for Jones & Smith Jones: $5,000/year income Values well at $30. Smith: $15,000/year income Values well at $90. $100 Well for Jones & Smith $100 Well for Jones & Smith Smith Jones Total $90 $30 $120 Total Cost to Build the Well $100 Value $100 Well for Jones & Smith $100 Well for Jones & Smith Could they voluntarily negotiate? $100 Well for Jones & Smith $100 Well for Jones & Smith Government provides well with ­ Flat amount contributions of $50 each ­ Flat rate income tax = 0.5% Government Smith $15,000 Jones $5,000 (Value $90) (Value $30) Alternatives Flat amount $50 $50 contributions Income Tax of $75 $25 0.5% Total $100 $100 $100 Well for Jones & Smith $100 Well for Jones & Smith Second Income Tax Option Flat rate income tax at 0.6% and Smith’s income falls Jones Income $5,000 Jones pays 30 Smith Income $10,000 Smith pays 60 $100 Well for Jones & Smith $100 Well for Jones & Smith Graduated Income Tax Jones Tax at 0.6% Smith Tax at 0.7% Jones Pays $30 Smith Pays $70 Conclusion? Conclusion? Designing an efficient tax system to assure contributions toward the provision of a public good is difficult under conditions of imperfect information and often very inefficient Alternative mechanisms Alternative mechanisms to provide public goods Public/private financing of Public/private financing of a public good Government provides pure public goods, but… Finances them by the sale of byproducts (e.g., advertisements) Private funding of public goods Private funding of public goods through excludability Exclusion by technology Pay­per­view TV Alternative Voluntary Designs Alternative Voluntary Designs With public goods (and externalities), the job of the policy analyst is to understand the incentives leading to the undesirable outcome and then design an alternative system that is not subject to the same incentive problems Alternative Voluntary Designs Alternative Voluntary Designs Provision Point Mechanism – solves free riding If the sum of the contributions reaches a threshold (the cost of the public good), then the good is provided. If not, everyone keeps their money. Surplus contributions are rebated. Provision Point Mechanism Provision Point Mechanism Example Harry, Sally, and others live in a community that is trying to build a park The park costs $60 to build Community members who wish to do so will donate money to a fund until there is a total of $60 available to build the park. At that point, any excess money will be returned to the donors. Government intervention Government intervention in private markets Government intervention Government intervention into private markets is not always optimal and can result in significant inefficiencies and some less that desirable outcomes Lest look at some side Lest look at some side effects of government intervention in private markets Unexpected Outcome: Unexpected Outcome: Offsetting Behavior Arkansas: Policy of BMI on report cards Response of parents FDA nutritional labels: Neglect of other nutrient intake Good v. bad cholesterol FDA sunscreen ratings: Increase in melanoma rates For example: For example: Sunscreens SPF rating? SPF rating? SPF Sun Protection Factor. The number you see associated with SPF represents the length of time you can stay out in the sun without burning, multiplied by the corresponding number. So a person who would normally start to burn in 10 minutes, could theoretically have 150 minutes of sun protection with a sunscreen that has an SPF of 15. But……… But……… SPF does not really correspond to the amount of time you can stay out in the sun without burning because sweating, clothing rubbing against the skin, and water sports will all wear the sunscreen off. Tests also use much more sunscreen than do most people, so SPF number results can be inaccurate. Usually, an SPF 15 rated sunscreen will give your about an hour of protection before you should reapply sunscreen. This, of course, varies from person to person. The SPF number only relates to ultraviolet B (UVB) protection. Ultraviolet A (UVA) protection is not measured through SPF numbers, and untilrecently, frequently was not available in sunscreens. UVB rays are more potent, quicker to produce sunburn, and have been linked to skin cancer. UVA is associated with aging of the skin, and along with UVB exposure, may increase risk or facilitate skin cancer. UVA though milder, is still not safe. FDA – Updates Rules on Sunscreen Labeling FDA – Updates Rules on Sunscreen Labeling Sunscreen Labeling Protection Act of 2008 Sen. Dodd (dem), Connecticut & Sen. Jack Reed (dem) RI Revision to 1978 Sunburn Protection Factor (SPF) labeling for shortwave ultraviolet B rays causing sunburn Comprehensive testing of products for UVA protection rates – 4 star rating system – for long wave ultra violet rays that penetrate the skin at a deeper level and causes skin damage (including cancer) Manufactures given 24 months to re label products ...
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