Two Plus Two Publishing LLC Two Plus Two Publishing LLC
 

Go Back   Two Plus Two Poker Forums > Other Topics > Politics

Notices

Politics political discourse

Reply
 
Thread Tools Display Modes
Old 11-13-2010, 11:27 PM   #1
Pooh-Bah
 
Sholar's Avatar
 
Join Date: Jul 2007
Posts: 5,608
Public Goods, Externality, and Free Riders: Containment Thread

I'd like to excise the discussion of the random public goods-related topics from the low content thread. So that this post has some content, a brief summary.

If Mises.org is your primary source for learning economics, you will certainly have some misconceptions. If you reject that possibility, then this thread is probably not for you. Mostly, this should be a place for people who are willing to learn stuff to ask questions.

A brief review of the words in the title -- Wikipedia is as always a decent source.

Public Good -- a good which is non-rivalrous (infinitely consumable) and non-excludable (all have access). Like such ideal goods don't exist, but to the extent that a good is like a "public good" the theory of public goods applies. Note that these are properties of the good. Who produces them is immaterial -- private actors can and do produce public goods, and state can and do produce goods which are not public goods. Also note the possibility that one can make a similar good which is excludable is not always relevant. These are just different goods. (A walled garden is not a public garden.)

Externality -- a property of transactions, this is a cost or benefit which is incurred by a third party.

Free Riders -- people can benefit from stuff without paying for it.

What is the free rider problem? That public goods don't get produced (aren't produced to optimal levels) because people who are willing to pay to have the good produced figure that they can get the benefit without paying, and so don't.

Finally, I'll conclude with these words of Coase:
"All solutions have costs and there is no reason to suppose that government regulation is called for simply because the problem is not well handled by the market or the firm."

That's to get us started...
Sholar is offline   Reply With Quote
Old 11-14-2010, 12:12 AM   #2
formerly mjkidd
 
SenorKeeed's Avatar
 
Join Date: Jul 2006
Posts: 22,710
Re: Public Goods, Externality, and Free Riders: Containment Thread

Originally Posted by Sholar
Quote:
No.

A transaction will take place (and the good produced) when the producer gets paid (enough) by the consumer. Here, externalities are irrelevant -- by definition, they involve other people.
The value of the externality associated with the production of the public good does not affect how much of the good is produced, but certainly it affects the "socially optimal" level of production of the good?
SenorKeeed is online now   Reply With Quote
Old 11-14-2010, 12:13 AM   #3
formerly mjkidd
 
SenorKeeed's Avatar
 
Join Date: Jul 2006
Posts: 22,710
Re: Public Goods, Externality, and Free Riders: Containment Thread

Also, how is a free rider not someone benefiting from an externality? He is a third party not involved in a transaction benefiting from that transaction.
SenorKeeed is online now   Reply With Quote
Old 11-14-2010, 12:26 AM   #4
veteran
 
Join Date: Aug 2006
Location: By Choice...
Posts: 2,739
Re: Public Goods, Externality, and Free Riders: Containment Thread

I've got sort of a cute example/illustration to start things off. And the government is nowhere to be found in it!

Suppose there is afirm looking to provide a particular public good. It can be supplied in different levels (say in hour long increments). Two people in town, Alice and Bob. Their actual values--also known as marginal benefits (and willingness to pay for the good) along with the firm's marginal cost per hour are listed below

Hours........Alice......Bob....Marginal Cost
1...........$18.......$10..........$2
2...........$16........$9..........$5
3...........$14........$8..........$8
4...........$12........$6..........$11
5...........$10........$4..........$14
6...........$8..........$3..........$17

So here, the optimal amount of the public good would be 5 hours, with Alice paying $10 and Bob paying $4. The marginal cost of providing that fifth hour equals the marginal benefit, which is the decision making metric which maximizes social welfare (it maximizes consumer surplus plus producer surplus).

Now suppose Alice is a lying bitch . She under reports her willingness to pay for this public good by $7. Now, the firm can only supply four hours of protection, and collects $5 from Alice and $6 from Bob for their good.

Is this in Alice's best interest? well, she loses the 5th hour of the public good, which means she loses something she values at $10. But instead of paying $50 (5 hours x $10/hr) she pays only $5/hour x 4 hours, or $20. So she is better off by $30, so she has incentive to lie, and to cause underproduction.

Note: the demand curve in this case makes it so the firm may want to under-produce if it is a monopoly (another market failure), but the willingnesses to pay could be adjusted to make the demand curve more inelastic so that the firm--even if it is a monopoly--will want to produce as much of the good as possible (possible meaning that the money/hour it can collect is greater than the Marginal cost)
................... is offline   Reply With Quote
Old 11-14-2010, 12:27 AM   #5
formerly mjkidd
 
SenorKeeed's Avatar
 
Join Date: Jul 2006
Posts: 22,710
Re: Public Goods, Externality, and Free Riders: Containment Thread

Also, sholar, do you agree with DrModern when he said in the LC thread that I have the definitions of public good and externality "weirdly tangled?"
SenorKeeed is online now   Reply With Quote
Old 11-14-2010, 12:28 AM   #6
Pooh-Bah
 
Sholar's Avatar
 
Join Date: Jul 2007
Posts: 5,608
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by mjkidd View Post
The value of the externality associated with the production of the public good does not affect how much of the good is produced, but certainly it affects the "socially optimal" level of production of the good?
Sure. Stuff gets made when people pay for it. How much better off the people who aren't paying for it become doesn't impact how much is made. But it does impact at what cost it would be "better" (in the sense of allocative efficiency) for the item to be produced.

Quote:
Originally Posted by mjkidd View Post
Also, how is a free rider not someone benefiting from an externality? He is a third party not involved in a transaction benefiting from that transaction.
A free rider is someone benefiting from an externality. The "free rider problem" refers to the problem of underproduction of public goods because people anticipate the ability to free ride.
Sholar is offline   Reply With Quote
Old 11-14-2010, 12:33 AM   #7
veteran
 
Join Date: Aug 2006
Location: By Choice...
Posts: 2,739
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by mjkidd View Post
Also, sholar, do you agree with DrModern when he said in the LC thread that I have the definitions of public good and externality "weirdly tangled?"
I also agree with what Scolar wrote--I can see where you're coming from. And a lot of Intro Micro books put Externalities and Public goods in the same chapter.

Trouble is that in the Block article, Block either was confused or redefining common economic terms. The definition of a private good has nothing to do with whether or not an externality exists.
................... is offline   Reply With Quote
Old 11-14-2010, 12:35 AM   #8
formerly mjkidd
 
SenorKeeed's Avatar
 
Join Date: Jul 2006
Posts: 22,710
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by Sholar View Post
A free rider is someone benefiting from an externality. The "free rider problem" refers to the problem of underproduction of public goods because people anticipate the ability to free ride.
Right. I was confused because you said in the other thread if you get people to enter into some sort of assurance contract so the following happens:

Quote:
Imagine a world in which everyone must agree before any transaction takes place. Now imagine that that doesn't add to transaction costs. There are no more externalities; the "problem of externalities" is solved, but crucially the underproduction caused by "free rider problem" is not.
Positive externalities associated with the production of the public good are only eliminated if everyone pays in advance for it, and if everyone pays for the public good in advance, none of them can free ride.
SenorKeeed is online now   Reply With Quote
Old 11-14-2010, 12:39 AM   #9
veteran
 
Join Date: Aug 2006
Location: By Choice...
Posts: 2,739
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by mjkidd View Post
Positive externalities associated with the production of the public good are only eliminated if everyone pays in advance for it, and if everyone pays for the public good in advance, none of them can free ride.
Check out the example I gave earlier--Alice is (partially) free riding, even if she pays in advance. I think that's the 'easy riding' which someone mentioned in the LC thread. Though I've never heard of that term being used before, I kind of like it.

In some sense, Alice is paying less than she should, which causes underproduction of the good since she lied in order to pay a smaller amount.
................... is offline   Reply With Quote
Old 11-14-2010, 12:45 AM   #10
Pooh-Bah
 
Sholar's Avatar
 
Join Date: Jul 2007
Posts: 5,608
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by mjkidd View Post
Also, sholar, do you agree with DrModern when he said in the LC thread that I have the definitions of public good and externality "weirdly tangled?"
Well, the principle is, first, to keep the ideas separate:
Externality is a property of the transaction.
Public Good is a property of the good.

Second, I don't know if it's a problem of definitions, necessarily. It's also related to how people misuse those terms when discussing "the problem of public goods" which is much, much more about "the problem of free riders" than it is "the problem of externality".

"to the extent that bread is a source of external economies it is a public good" makes the mistake of confusing the two ideas. Talking about the value of the (positive) externality of a public good, for example, in this exchange, is what causes that reaction:

Quote:
Originally Posted by mjkidd View Post
And am I correct in the following? The monetary value of the externality associated with the production of a public good compared to the revenue that the producer of the good would realize from the good is what determines to what extent a good with public good characteristics would be underproduced.
Quote:
Originally Posted by Sholar View Post
No.

A transaction will take place (and the good produced) when the producer gets paid (enough) by the consumer. Here, externalities are irrelevant -- by definition, they involve other people.

(Imagine a world in which everyone must agree before any transaction takes place. Now imagine that that doesn't add to transaction costs. There are no more externalities; the "problem of externalities" is solved, but crucially the underproduction caused by "free rider problem" is not. Considering the case of negative externality may help to clarify this for you. See, for example Coase. The "good link" in the below post is good, and hopefully pretty comprehensible.)
Sholar is offline   Reply With Quote
Old 11-14-2010, 12:50 AM   #11
formerly mjkidd
 
SenorKeeed's Avatar
 
Join Date: Jul 2006
Posts: 22,710
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by ShaneP View Post
I also agree with what Scolar wrote--I can see where you're coming from. And a lot of Intro Micro books put Externalities and Public goods in the same chapter.

Trouble is that in the Block article, Block either was confused or redefining common economic terms. The definition of a private good has nothing to do with whether or not an externality exists.
He didn't define public goods in that way. He said that people use the externalities associated with the production of public goods as a justification for government production of those goods. Which seems true enough. He gives a very standard definition of public good later in the paper:

Quote:
A pure public good is defined by Haritos as one, such as an outdoor circus, or national defense, "which all enjoy in common in the sense that each individual's consumption of such goods leads to no subtraction from any other individual's consumption of that good." The polar opposite of this is the pure "private consumption good, like bread, whose total can be parcelled out among two or more persons, with one man having a loaf less if another gets a loaf more."
SenorKeeed is online now   Reply With Quote
Old 11-14-2010, 12:53 AM   #12
Pooh-Bah
 
Sholar's Avatar
 
Join Date: Jul 2007
Posts: 5,608
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by mjkidd View Post
Right. I was confused because you said in the other thread if you get people to enter into some sort of assurance contract so the following happens:

Positive externalities associated with the production of the public good are only eliminated if everyone pays in advance for it, and if everyone pays for the public good in advance, none of them can free ride.
Quote:
Originally Posted by ShaneP View Post
Check out the example I gave earlier--Alice is (partially) free riding, even if she pays in advance. I think that's the 'easy riding' which someone mentioned in the LC thread. Though I've never heard of that term being used before, I kind of like it.

In some sense, Alice is paying less than she should, which causes underproduction of the good since she lied in order to pay a smaller amount.
This is a good example.

The problem of free riders doesn't disappear by asking those people to join the transaction (which removed the externality). Compare this to the problem of (negative) externalities, which is solved by incorporating everyone into the transaction (hence the stuff about Coase).
Sholar is offline   Reply With Quote
Old 11-14-2010, 12:58 AM   #13
veteran
 
Join Date: Aug 2006
Location: By Choice...
Posts: 2,739
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by mjkidd View Post
He didn't define public goods in that way. He said that people use the externalities associated with the production of public goods as a justification for government production of those goods. Which seems true enough. He gives a very standard definition of public good later in the paper:
Well, he does get excludability correct--but my beef with the quotes I saw wasn't actually in his definition of public good, but with either how he was confused about private goods not having externalities or how he was redefining common economic terms (defining private goods as things that don't have externailities--in addition to the other parts of the normal definition).

I didn't see his statements about people arguing for government intervention. My own view is that you could come up with at least three alternatives once you know about the problem with public goods.

1. Gubmint provision
2. Ignore the problem (or at least know how big the problem that you've decided to live with is.)
3. Try to come up with novel ways of dealing with the problem.

The third alternative may include second-best solutions, or actually first-best solutions with 'weird' ways of asking and collecting money from people. It's been a while, but I remember some strange rules when asking people how much they're willing to pay and then deciding how much they should pay that result in better allocations.
................... is offline   Reply With Quote
Old 11-14-2010, 01:07 AM   #14
formerly mjkidd
 
SenorKeeed's Avatar
 
Join Date: Jul 2006
Posts: 22,710
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by Sholar View Post
This is a good example.

The problem of free riders doesn't disappear by asking those people to join the transaction (which removed the externality). Compare this to the problem of (negative) externalities, which is solved by incorporating everyone into the transaction (hence the stuff about Coase).
Well that's only a problem to the extent that the assurance contractor is unable to effectively price discriminate. If I go to Wal Mart and buy a TV that I value significantly more than the price of the TV, no one would say that I am a free rider. They would simply say that WalMart is unable to effectively price discriminate.
SenorKeeed is online now   Reply With Quote
Old 11-14-2010, 01:13 AM   #15
veteran
 
Join Date: Aug 2006
Location: By Choice...
Posts: 2,739
Re: Public Goods, Externality, and Free Riders: Containment Thread

Quote:
Originally Posted by mjkidd View Post
Well that's only a problem to the extent that the assurance contractor is unable to effectively price discriminate. If I go to Wal Mart and buy a TV that I value significantly more than the price of the TV, no one would say that I am a free rider. They would simply say that WalMart is unable to effectively price discriminate.
Being able to price discriminate or not does not affect the welfare of society. The producer surplus plus consumer surplus will remain unchanged if the number of transactions is unchanged.

And actually, in my example, the firm was able to perfectly price discriminate to determine the optimal level of the good. Alice paid $10 and Bob $4 in the optimum.

Finally, I'd say that price discrimination doesn't really have anything to do with public goods. I replied to you to help, but this is sort of a tangent to the main thrust of the thread.
................... is offline   Reply With Quote

Reply
      

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off




All times are GMT -4. The time now is 01:29 AM.


Powered by vBulletin®
Copyright ©2000 - 2014, Jelsoft Enterprises Ltd.
Content Relevant URLs by vBSEO 3.6.0 ©2011, Crawlability, Inc.
Copyright 2008-2010, Two Plus Two Interactive