Lectures 13 to 15

CHAPTER 3: PUBLIC GOODS

3.1: Public Goods Pure Private to Pure Public Good • Private good consumed only by one person: food, holidays, clothes • Family/household: all collective decisions and no market. ‘Micro- collective’. Share kitchens, TV, bathrooms. • Many families/household: roads and paths, communal halls, clubs etc. Tennis and golf clubs, plus Tidy Towns’ committees for example. ‘Mini- collective’. • Option public goods: fire brigade, hospitals, museums, etc. Provided by state but not used by all. ‘Partial full collective’ • Pure public goods benefit ALL. ‘Full collective’. National security, environment, lakes, sea and mountains. Used by all but to varying degrees. • Exclusion impossible. Raises free-rider problem: e.g. lighthouse, but now excludable. Firework display a good example (see later) • Public goods bring benefits just like private goods: Ui = F(A, B, C, D) • Same supply for ALL: G1=G2=G3= etc. Not same utility though. • Private good, A; same price and utility but different supply • Pure v impure PGs: security v bridge (Fig 3.1) • Fire brigade example (p. 144). Available to all, but only used when needed if ever. Private company would protect only those how had paid. • Public goods v natural monopolies (e.g. electricity or water) but private

A fireworks display is a public good because it is non-excludable (impossible to prevent people from viewing it) and non-rivalrous (one individual's use does not reduce availability to others).

Voluntary payment (Fig 3.3) • MC curve same as that for private goods (Fig 3.3): n people benefit though from every extra unit. • Each pays or shares cost according to benefit: implies different ‘prices’ • Impossible to implement: information and free-rider problems. Why give correct answer if tax will be higher? • Example: benefit to each = €60, total cost = €80 (€40 or net benefit of €20 each). What should P2 do?

Public Good Net Benefit P1 P2 P1 truthful: P2 also 20 20 P2 free rides -20 60 P1 free rides: P2 pays 60 -20 P2 free rides 0 0

Volunteer provision: • Local public goods like street park, reporting a suspicious person, ‘finger in dyke’ example. Public lane or broken glass on beach examples. • Will happen if person received individual benefit greater than cost ( e.g. if benefit above for each person = €100). • All others benefits also and this may incur psychic costs on provider. • Happens very often in families. • Social norms (e.g. religion, soup kitchens, meals on wheels). Volunteer provision.

National Defence as a Public Good • Classic public good with huge popular support for it. For example, once Europe safer for one person it is safer for all • Conscription accepted if professional army not large enough. Also overcomes free-riding problem. • Also volunteer forces and moral suasion. ‘Your country needs you’. • Arms Race issue: depends on your relative spend • Treaties to deal with this. • Use weapons outside treaties or don’t honour Treaty. • Military alliances: e.g. NATO. Pooling resources because of huge costs but also mutual support and defence. • Huge imbalance in military power (e.g. Israel and Lebanon. Good or bad? • Not if one side prepared to sustain greater human losses, or has nuclear or biological weapons, e.g. Isis, N Korea • Also post-war difficulties (e.g. Iraq, Libya). Winning ‘peace’ not war the real difficulty. Can also ‘impose’ democracy on country with no history of it. • Democracy a defence against wars? • Supply of defence equipment as a factor (e.g. France and US major weapons manufacturers.

Defence Against Terror: new issues

Attack at the Bologna railway station on 2 August 1980

• Military cost plus personal (e.g. fear of ‘unknown’ and security checks and delays). Paris latest example. Dublin bombings in 1970s. • Poverty and terrorism: nothing to lose • Objectives of terrorists and incentives to act (reward in after life) • Moral dilemmas: efficiency v discrimination in screening • Pre-emptive strike concept: ‘guilty’ then before crime even committed. Hiroshima? • Appeasement or not? IRA, N Korea, ISIS? • Co-lateral damage involves huge civilian casualties

3.2 Information Problems How do governments know how much of a public good to supply? (Numerical examples on board) • Lindahl ‘solution’, taxed according to benefit: prisoners’ dilemma again (skip) • Special cases: Cost Benefit Analysis and major infrastructural projects (done in 3.3) • Carefully designed surveys, for example RTE, or BBC • Majority voting (done in Module 2)

3.3 Cost Benefit Analysis: Applies to Impure Public Goods only (e.g. metro north, new ring road around Dublin) • Try to get rough aggregate B and C and pay out of general taxation the only practical solution • B > C project worthwhile • Easy for a private firm but not for a project with private and public Bs/Cs • Many of the major Bs and Cs cannot be estimated Transport example: Road Construction (Compensation Issue)

• Costs that can be estimated: construction, maintenance, link roads, signposting • Costs that cannot be estimated: huge disruption during construction, noise and vibration, air pollution, scenic and visual, heritage and ecology, community severance. • Almost all benefits difficult to quantify. • Saving of lives (see p. 104). What is the value of a life? • Time savings (main reason for new roads), for both existing traffic and new (how to predict) • What actually will be the time savings? Will it be for business and/or leisure travel? How to put a value on each? • Were alternatives considered to give bigger net benefit: alternative route, trains, road charging? For example, electrical pylons put underground? Location of wind farms. • Can though list Bs and Cs at least

Valuation over Time (3.3B and 3.3C) • Many benefits only arise into future (e.g. Port Tunnel or metro north). • (i)Unpredictable. (ii) How to value? • €1M in year X worth much more than in year X + 20 say • What is present value of €1M ten years hence? Depends on ‘discount rate’. • 5% implies worth only €0.38M today, much less 20 years on, and nothing after this. Climate change? • Must get PV of project, by discounting net benefits for all years. • Choice of discount rate critical

Project X Y b c b c 2013 0 €100M 0 €100M 2014 €110M 0 0 0 2015 0 0 €115M 0

• Discount rate < 4.6% implies Y chosen, but > X chosen (see book)

Distributional effects: B > C but main beneficiaries are well-off people: e.g. LUAS debate (see pp. 109-110) Carefully designed surveys (e.g. recent BBC CV survey) • Do people know what is being asked (information and accuracy bias)? • Do they know or understand cost? • Strategic or dishonest preference revelation

Majority Voting (Chapter 6) • Cannot estimate benefits, then rely on straight vote of majority. • 51 people have B of say €9K and 49 have B of €20K: all 100 have cost of €10K. • B > C but majority reject (see 3.1.4) • Intensity of preferences ignored in democratic voting: have to be but.. • Other means used (street protests, persistence, etc)