So, what determines whether governments should intervene or provide public goods? Well, it depends on whether the social costs outweigh the social benefits (the total social costs and total social benefits- this is includes both private costs and benefits, and externalities). The social costs are the total opportunity costs of a government intervention (eg: should there be marginal cost pricing for vancouver translink? Well, the social costs are the taxpayer dollars which could have been spent in other ways: ie, to lower UBC tuition). The social benefit of an intervention is the cost of the market failure which the intervention prevents. Sometimes, by intervening and attempting to correct a market failure, a government incurs an even larger social cost than the market failure would have caused.
So is there a social benefit to a new skating oval in richmond? Absolutely not! There was no social demand for this skating oval prior to the olympics, and the money could have been spent on much more important things (eg: social housing)
PROBLEMS WITH COST-BENEFIT ANALYSIS?
-How do you quantify subjective costs and benefits to society (eg: the happiness something will bring, the future problems pollution could cause, etc)?
-It can be difficult to forecast the future, and many economic predictions rely on predictable futures (case example: many provincial governments went WAY over budget in 2009, because they did not anticipate the economic meltdown).
-Governments often discount future costs in order to benefit the present (the olympics is a perfect example: vancouver and the BC government are spending billions of dollars on a small party, which we will have to pay off, with interest, for years and years in the future)
METHODS OF GOVERNMENT INTERVENTION:
-Public provision versus user-pay: is it better for the government to own and provide a particular service, or is it better for the government to contract that service out to the private sector, and then just pay the private sector for their work? **Note: check out the handi-dart strike in Vancouver if you want a really cool look at some of the problems that can result from contracting out public work to the private sector. This goes against the right-wing principles of Gatemanism, but its definitely worth a look.
-Regulation (some problems are that there are costs to enforcing regulations, and most firms can find some kind of legal loophole to get around enforcement)
-Redistribution of income (Taking money from the rich and giving some to the poor through different social programs. socialism! Yay!)
COSTS OF INTERVENTION:
-Direct costs: The government uses real resources (ie: steel to make military vehicles)
-Indirect costs/externalities: ie, extra costs of production due to safety standards and environmental control (eg: safety goggles and pollution filters cost money), costs of compliance (eg: Red tape and pay equity), and the cost of Rent seeking (where companies pay for lobby groups to lobby the government for economic advantage).
WHY DOES THE GOVERNMENT OFTEN FAIL WHEN INTERVENING IN MARKETS? Most of the causes of government failure are systemic- they occur naturally within the system of government intervention.
Public Choice Theory:
-There are three different stakeholders for government policy
Politicians: They want to maximize their political power
Bureaucrats: Want to maximize authority and salary
Electorate: Want to maximize utility
The electorate want to maximize their total utility, and often, this is achieved when private citizens choose to IGNORE political-economic policy issues. This is called RATIONAL IGNORANCE: There is no incentive for the electorate to become informed when they only have one vote each. As a result, government can get policies which hurt the electorate passed because we don't have the information to stop them.
Rent Seeking: Special Interest Groups have an inordinate ability to lobby the government and get policies created which benefit them at the expense of everybody else.
Democratic Inefficiency and public Choice:
-One vote fails to account for preferences (so people have, in reality, very little control over the decisions the government makes)
-There is a TRADEOFF between democratic processes and efficiency (so the more democratic something is, the longer it takes to get anything done. Key examples of this include governments like Weimar Germany, which were socially democratic, but incredibly inefficient. In Weimar germany, the merits of everything had to be weighed and voted on, so it took them ages to actually get anything accomplished. Fascism, although often terrible, is much more efficient than democracy).
Government Monopolies: In industries in which there are government monopolies, there are no market forces to create innovation and further efficiencies, which can lead to stagnation. This is not good! Think of Canada Post, and how inefficient it is!
OKAY, so what is the optimum level of government intervention? Well, to decided that, you have to compare the market with government performance. Usually, this involves making value judgements, which is why so many different countries have different levels of government intervention in their economies: they have made different value judgements!
THAT'S THE END OF ECON 101!
HERE IS THE TAKE HOME MESSAGE:
1: Assume nothing. Why? Well, economics is all about putting together arguments. In order to make a good argument, you need to get rid of your assumptions, don't jump to conclusions, and evaluate the evidence clearly for yourself. Make sure your arguments are based on observable, provable facts, and not sound-bites which you've picked up from different sources.
2: Rational Wisdom: Using your smarts with a broader perspective!
-You're at least as smart as the next person. There's even the chance that you might be smarter.
-There are benefits to this: we probably get to become important people.
-On the other hand, you must use your smarts with humility and responsibility. Don't be arrogant- instead use your powers for good.
Congratulations on finishing Econ. It's study time. If you read these notes at all, share them with your friends. I'm probably going to be organizing some small scale, not-for-profit review sessions for anyone who's interested over the next couple of weeks. I'll be making a post here as soon as I've got times and dates figured out for that.
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