Lecture: Role of Government Chapter 19 Outline

Types of Goods

• Public Goods: 2 qualities
• Nonrival: someone’s consumption does not reduce the amount available for others to consume.
• Control of disease vectors (malaria)
• Food and water safety
• Non-excludable consumer cannot be excluded from consuming the good either by having to pay or through some other mechanisms.
• Classic example national defense.

Types of Goods

• Merit Goods: good that are thought to be good for someone regardless of the person’s own preferences.
• Compulsory education.
• Wearing seat belts or helmets on motor cycles.
• Tobacco and drugs.
• Market failure because don’t consume enough of it.

Rational for government intervention

• Government’s often try to correct market failures (market distortions).
• Remember the theory of the second best, fixing the distortion won’t necessarily make people better off (may or may not).
• Need to think about when government intervention may be appropriate.
• Can sometimes be a value judgement.
• In health care governments are not aiming for perfect competition because not achievable for much of health care. Instead use other mechanisms than a price mechanism to ration health care.

Rational for government intervention

• Public Goods:
• Market failure because too little of the good is produced in private markets.
• Usually large number of individuals.
• Individuals unlikely to cooperate to fund substantial amounts of public goods through voluntary contributions.
• Free-riders: can’t exclude them from the benefits, but free-ride b/c an voluntary contribution has a negligible impact on availability.
• Government takes responsibility for providing good.
• E.g. control of disease vectors (malaria), clean air, food and water safety, information, medical research (some types), information, voluntary giving (redistribution)