TUTORIAL 3: CHAPTER 7

PUBLIC GOODS

I. Short answer questions

1. Education can be defined as a private good, even when supplied by the government.
Explain what attributes of education make education definable as a private good.

According to a rigorous interpretation of the economics of public goods theory

education may be considered a private benefit. But classroom space is limited. Larger class
sizes may have an impact on the performance of education offered & received. States have
embraced privatization to solve the issues that have arisen as a consequence of the growth of
education as well as the associated raised reliance on public finances. As well as to respond
to the government's inability to offer high-quality education. But a large number of children
out of school, inadequate education & low quality of education are the problems that lead to
more participation of semi actors.

2. Think of an example of a free rider problem in your hometown. Can you think of a
way for your local government to overcome this problem?

Free rider problem occurs when individuals utilize products or services and fail to
contribute towards the payment of the product, thus may impact under- provision of the
product. An example of a free-rider problem within a hometown includes the provision of
street lights for local homesteads where individuals benefit from the use but fail to pay for
it. The suitable solution to this problem would be soliciting funds or donations from the
local individuals and the local organizations, which will aid in covering some costs.

II. Multiple questions

1. Cable television is which of the following?

a. Excludable but not rival
b. Rival but not excludable
c. Both rival and excludable
d. Neither rival nor excludable
e. Altruistic

2. Which of the following is a property of a certain shirt?

a. Non-rival in consumption
b. Rival in consumption
c. Non-excludable
d. Both a and c
e. Both b and c

3. In general, which of the following is true?

a. Private markets overprovide public goods.
b. Private markets underprovide public goods.
c. Private markets provide the socially optimal amount of public good.
d. Public goods must be priced at more than twice their price in the private market in order to
provide the socially optimal amount.
e. Both b and d are correct.
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4. If individuals care about the outcomes of others as well as themselves, economists refer to
them as which of the following?
a. Free riders
b. Utility maximizers
c. Irrational
d. Actuarially adjusted
e. Altruistic

5. Which of the following activities is considered altruistic?

a. Planting flowers in your yard
b. Donating money to the Red Cross
c. Going to college
d. All of the above
e. Both a and b

6. Which of the following is a barrier faced by the government in attempting to solve the free
rider problem in the provision of public goods?
a. Non-altruistic behavior
b. Crowding-out of private provision
c. Measuring the preferences for public goods
d. All of the above
e. Both b and c

7. Suppose that in response to the government giving grants to local medical research projects,
you reduce your annual gift. This is an example of which of the following problems with the
public provision of public good?
a. Measuring preferences for the public good
b. Crowding-out of private provision
c. Measuring the costs and benefits of public goods
d. All of the above
e. Both a and c

8. Which of the following refers to the idea that even if individuals are willing to tell the
government how much they're willing to pay for public good, they may not have an idea of
what that is?
a. Preference revelation
b. Preference aggregation
c. Preference knowledge
d. Warm-glow effect
e. Altruism

9. Suppose that the city manager says that everyone lied about how much he or she would value
a proposed city project. This is an example of which of the following?
a. Preference revelation
b. Altruism
c. Preference knowledge
d. Warm-glow effect
e. Preference aggregation
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10. Taxing noncontributors to finance the provision of a public good will lead to which of the
following?
a. More accurate preference revelation
b. Altruism
c. Increased crowding-out of private provision
d. Decreased crowding-out of private provision
e. Easier preference aggregation

III. Reading discussion:

EXERCISE 1:
Summarize the articles: Public Goods in a Market Economy— The Case Study of China
(Bill Y. Chen, Professor) – file attached.
https://www.researchgate.net/publication/
266674197_Public_Goods_in_a_Market_Economy-Case_Study_of_China
Required sections: IV, V, VI.

* SECTION IV
According to the article Public Goods in a Market Economy studied by Bill Y. Chen, Professor.
In terms of the government’s roles in the public goods market. There are different ways for the
government to involve in the public goods market, in particular:

 fully public financed and managed, it means the government entirely finances and
manages them (such as Military & other security divisions, freeways, and other
transportation systems)
 The second way is Financed by the Public but Managed by the Experts. It means the
public goods are financed by the taxpayers but managed by the relevant experts with the
supervision of the relevant government officials
 Financed and Managed by the Relevant Society (homeownes => special association ->
self-finance & manage their community)
 Inefficiency of the resource allocations.

The purpose of government involvement in the public goods market is to solve the
inefficiency of the resource allocation since the private sectors have no incentives to
produce these desirable goods. But unlike a private firm, which is governed by demand,
supply, and market equilibrium, the government may misuse its resources. This happens
because of special interest groups' influence and because elected officials want to please
constituents.

 Bureaucracy and mismanagement.

The decision-making process of the government is usually too slow. It takes too long
time to decide whether, where and how to produce a public good. Also, there is a lack of
accountability and responsibility among government officials and its management teams. In
addition, there is a lack of the flexibility with the governments. (e.g. a post office may never
take action even though there are too many people waiting for the services)

 Corruption

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 Business people may make bribes for public contracts; government officials take
bribes and then award the bribers

 The monopoly

Many public goods are financed and managed by the government with a monopoly.
As a result, there is little or even no competition so the management team of the public
goods has no incentive to improve its products or services

 The lack of entrepreneurship

The basic nature of entrepreneurship is that people evaluate a new project, its cost
and benefit, then make a choice whether to take the opportunity/risk. With the lack of
entrepreneurship, entrepreneurs have insufficient incentives to produce public goods.

 Inequality of the public goods distributions.

Governments may distribute public goods unequally to different regions and people,
and the undeveloped areas and people who most need them may not obtain the desirable
public goods. . Thus, the economic and welfare inequality is worse in these areas even when
the whole country’s economy has developed and improved significantly.

SECTION V. A case of China’s public goods provision

China used to be a centrally planned and central government-dominated economy.

As a result, the majority of the public goods were provided and financed by the central
government. Each Province competed and strived to obtain the central government`s money
so it could develop and invest more in its public projects. With its reform and openness to
the world since 1978, China has gradually decentralized its economy and fiscal system. As a
result, state and local governments are having more resources to 6 finance and invest in its
public projects. We have witnessed very fast progress and developments in China`s public
products industries and which have better served its people`s needs.

However, there are many serious problems with respect to China`s public goods
provision. As China itself has recognized, corruption in the public product markets has
been very serious. China`s fast economic growth to some extent has made wealth and
development inequality gaps larger among people and regions (Ping & Bai, 2005; Zhang &
Fan, 2006). In particular, governments should decide the size and investment in public
projects based on people`s needs, available resources, and technical feasibility. China has
been changing its economic system from centrally planned to market-oriented. However, a
market economy system cannot solve all problems, especially with public goods.

Some of China's public projects lack necessary quality control and could result from
corruption or lag on quality control. Some China-made products recently have scared the
world because of their low standards or bad quality or even poison. It will take time for
China to solve the above problems relating to its public goods provisions.

SECTION VI. HOW TO IMPROVE THE EFFICIENCY OF THE PUBLIC GOODS

PROVISIONS

 Appropriate, clear long-term objectives and goals.

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 Success or failure in improving the efficiency of public goods provision depends on
whether it has the appropriate and clear long-term objectives, goals, and appropriate long-
term plan.

 Production possibilities frontiers and opportunity costs.

A government often tries to do too much without recognizing its resource limits. The
government needs to recognize its production possibilities frontiers and opportunity costs.
Since it has limited available resources, the government, in a given period, can only produce
the limited maximum amounts of different products and services.

 Using shadow prices to better allocate resources

A shadow price of a resource such as raw materials (oils) is the additional value to
the economy or the objective function for one-unit increase of that resource to the economic
system. When a resource has its surplus, its shadow price is zero. When there is a shortage,
its shadow price is positive. The more valuable the resource is to the economy, the larger the
shadow price. Using such a theory/method, the government can better allocate its resources
and better produce the public goods to meet its people’s needs.

 Using private sectors to help supply the public goods.

 Using competition

In the public goods market, the government should also use the competition as much
as possible. An open biding process save resources, improve quality, and also help reduce or
eliminate the possible bribes and corruption.

 Charging some reasonable fees

Apart from free public goods, some reasonable fees should be charged to the users.
For example, government-sponsored health-insurance

 Entrepreneurship and innovations

The government should encourage and award entrepreneurship and innovations in its
process of the public goods supply. For example, they can hire entrepreneurs to manage
public projects, and outsource some parts of productions and services to the entrepreneurs.

 Regulations and laws.

It is the government’s responsibility to pass laws and regulations to better protect

people. Particularly, relevant laws and regulations are needed to protect people’s safety, the
fair use of the public goods and to maintain the quality of the public goods.

EXERCISE 2:
A Day in Your Life: We use public goods every day, but often don’t realize it.
Part 1:
Each day we wake up and go through our morning routine, checking our phones, and having
our beverage of choice. Between our morning routine and the time we go to bed we perform
myriad tasks at home, at work, and at play. Most of us go about our day using products and
services that help us navigate our day smoothly, without giving any thought to how they come
to exist or how we get them. In this exercise, you will explore a typical day for you and the

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various goods and services that you use during the course of a day. Use the prompts below to
identify some goods and services that you use “for free” and ones that you pay to use.

1. Think about a typical day in your life from the time you wake up until you go to bed:
What services or products do you use every day that you don’t pay for when you receive
or use them? Think about this in contrast with things you pay for directly. An example of
the latter is your smartphone. That’s a private product. Examples of the former are GPS,
which your phone relies on, and the streets you use to get to school. What are some other
services and products that you use pretty much every day but don’t pay for when you use
or get them? Jot down a list (4 – 5) of these types of goods and services.

- You go into the kitchen for breakfast. You pour some water into your coffeemaker.
You simply take for granted that this water is safe to drink. But in fact, you count on your
city water department to constantly monitor the quality of your water and to immediately
take measures to correct any potential problems with this vital resource. 

- You go to university and take the elevator. You just assume that the elevator is
safe; and it is, thanks in part to the annual elevator inspections conducted by your state
government. It is probably nothing you will appreciate until the next time the elevator
breaks down with you inside, and that makes you think a bit more about the reliability of
elevators.

- You use the toilet and flush it. Your local government then takes care of
transporting this waste, treating it, and disposing of it in an environmentally responsible
manner – all without a second thought by you. 

- You stop at a local gas station to fill up. How do you know the price you are
paying for this gasoline is a fair and competitive one? In many states, the Department of
Attorney General has been responsible for finding and prosecuting cases of price
manipulation and price fixing by oil companies and distributors.

2. If you did not pay each time you got or used those products or services as you went
through your day, this raises some questions: How were they paid for? And who produced
them for you?

In economics, a public good refers to a commodity or service that is made available

to all members of society. 

Typically, these services are administered by governments and paid for collectively
through taxation.  For instance, one person can use a public streetlamp, yet it doesn't
diminish the ability of someone else to also use it. Public goods are almost always funded
publicly through the government. Perhaps the only public goods that aren't, are natural
goods such as air, the sun, and such.

Government spending and taxes are one way to provide public goods, but they're not
the only way. In some cases, markets can produce public goods. Think about radio, for
example. It is non-excludable since once the radio signal is broadcast, it would be very
difficult to stop someone from receiving it.

Part 2:
Read the following article and discuss 2 below questions:

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Reading & Video • A Day in Your Life –
https://governmentisgood.com/articles.php@aid=1
1. Are there any changes or additions you would make to the description of your own
typical day after reading “A Day in Your Life”?

After reading "A day in your life", I understand more about the emergence of public
goods theory in everyday life along with some solutions that the government improves
people's lives in this article like: strict management of the federal information system, laws
to reduce air pollution, measures to help clean water sources, securing contracts for private
property, etc.

Public goods are important because they are designed to be available to the public in
general and possess specific qualities that prevent individuals or groups from being unable
to access them. They also must be able to withstand use without then becoming unavailable
to future users. State intervention in the economy is a fact, as well as a principle, that has
been widely acknowledged. The government can use fiscal policy to intervene in the
economy, in the form of state budget revenue and expenditure. The state redistributes
income through taxes and public expenditures to provide necessary public goods for society.

2. If a product or service you use the most every day is produced by government – did that
realization take you by surprise?

As I mentioned above, the government plays a significant role in providing goods

such as national defense, infrastructure, education, security, and fire and environmental
protection almost everywhere. These goods are often referred to as “public goods”. So, If
the product or service we use the most every day is made by the government, I wouldn't be
surprised. 

Besides, Public goods are of philosophical interest because their provision is, to
varying degrees, essential to the smooth functioning of society—economically, politically,
and culturally—and because of their close connection to problems concerning the regulation
of externalities and the free-rider problem.

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