Chapter 16: Public Choices, Public Goods, and Healthcare – Microeconomics Study Notes

Public Choices

Introduction to Public Choices

Public choices are decisions that have broad consequences for society, often made by political leaders or public servants. These choices impact the allocation of scarce resources and shape policies such as regulation, taxation, and government spending.

• Definition: A public choice is a decision affecting many people or society as a whole.

• Examples: Tax policy, government spending, price regulation, and international trade decisions.

• Importance: Large quantities of resources are allocated through public choices.

Why Governments Exist

Governments play a crucial role in the economy for three main reasons:

1. Establish and maintain property rights

2. Provide nonmarket mechanisms for allocating scarce resources

3. Implement arrangements that redistribute income and wealth

Government Failure

Replacing markets with government allocation is complex and can lead to inefficiency, known as government failure.

• Government failure: Occurs when government actions result in inefficiency, either through overprovision or underprovision of goods and services.

Political Marketplace

Public choices are made in a political marketplace involving four groups:

• Voters

• Firms

• Politicians

• Bureaucrats

Voters and firms express demand for policies through votes and campaign contributions, while politicians and bureaucrats supply policies and public goods.

Political Equilibrium

A political equilibrium occurs when the choices of all groups are compatible, and no group can improve its position by changing its choice.

Median Voter Theorem & Political Economy

• Median Voter Theorem: Political candidates tend to adopt policies favored by the median voter to maximize votes.

• Asymmetry: Winners from policies are often concentrated, while losers are diffuse, leading to large per-capita gains for winners and small losses for losers.

Classification of Goods

Excludability and Rivalry

Goods and services are classified based on whether they are excludable or nonexcludable, and rival or nonrival.

• Excludable: Only those who pay can enjoy the benefits (e.g., private security, farmed fish, ticketed concerts).

• Nonexcludable: Impossible or costly to prevent anyone from benefiting (e.g., police services, ocean fish, TV broadcasts).

• Rival: One person's use reduces availability for others (e.g., consuming a fish).

• Nonrival: One person's use does not reduce availability for others (e.g., watching a TV broadcast).

Four-Fold Classification of Goods

	Excludable	Nonexcludable
Rival	Private Goods Food, drink, car, farmed fish	Common Resources Ocean fish, atmosphere, national parks
Nonrival	Club Goods Cable TV, bridge/tunnel	Public Goods National defense, law, air traffic control

Government Provision of Goods

• Public Goods: Nonrival and nonexcludable (e.g., national defense).

• Common Resources: Rival and nonexcludable (e.g., ocean fish).

• Club Goods: Nonrival and excludable (e.g., Netflix, cable TV).

• Private Goods: Rival and excludable (e.g., food, farmed fish).

Healthcare and Education

• Healthcare: Consists of healthcare services and health insurance. Governments provide these due to market inefficiency and unfair distribution.

• Education: Provided by governments because of external benefits—societal gains from an educated population.

Providing Public Goods

The Free-Rider Problem

A free rider benefits from a good or service without paying for it. Public goods create a free-rider problem, as no one can be excluded from their benefits, reducing the incentive to pay.

Valuing Public Goods

• Value of a private good: Maximum amount an individual is willing to pay for one more unit.

• Value of a public good: Maximum amount all individuals are willing to pay for one more unit.

• Total benefit: Dollar value placed on a given quantity of a good.

• Marginal benefit: Increase in total benefit from a one-unit increase in quantity.

• The marginal benefit of a public good diminishes as quantity increases.

Marginal Social Benefit and Cost

• Marginal Social Benefit (MSB): Sum of all individuals' marginal benefits at each quantity.

• Marginal Social Cost (MSC): Determined similarly to private goods.

• Efficient Quantity: Achieved when $MSB = MSC$.

Equation:

$MSB = MSC$

Efficient Provision and Political Competition

• Private firms underprovide public goods due to the free-rider problem.

• Government provision, funded by taxation, can overcome this problem.

• Political competition drives parties to propose the efficient quantity of public goods.

• Principle of Minimum Differentiation: Competing parties/firms tend to adopt similar policies/products to appeal to the majority.

Overprovision and Bureaucratic Incentives

• Bureaucrats may seek to maximize their department's budget, leading to overprovision of public goods.

• Rational Ignorance: Voters may choose not to acquire information about policies if the cost exceeds expected benefit, enabling bureaucratic overprovision and deadweight loss.

The Economics of Healthcare

Market Failure in Healthcare

Healthcare is often underprovided and unfairly distributed in a purely market system due to:

• People underestimate the benefits of healthcare.

• People underestimate their future healthcare needs.

• Many cannot afford necessary care, especially those with chronic conditions or the aged.

Marginal Social Benefit in Healthcare

• The marginal social benefit of healthcare exceeds the perceived marginal benefit, leading to inefficient underprovision in competitive markets.

• Deadweight loss results when only those able and willing to pay receive care.

Public Funding Approaches

• Levels of public funding vary by country (e.g., UK: 83%, Canada: 70%, US: 48%).

• Three main approaches:

  • Universal coverage, single payer (government as sole purchaser)

  • Private and government insurance (mixed system)

  • Subsidized private insurance (e.g., Obamacare)

Universal Coverage, Single Payer

• Government provides healthcare to all at zero or low price.

• Quantity supplied is fixed, often less than efficient quantity, leading to waiting times and some deadweight loss.

• Fairness is emphasized, but access may vary based on ability to navigate the system.

Private and Government Insurance

• Healthcare provided by private doctors/hospitals, funded by private insurance, government programs, and out-of-pocket payments.

• Quantity provided may exceed efficient quantity, creating deadweight loss.

Subsidized Private Insurance (Obamacare)

• Government provides subsidies to make insurance affordable.

• Subsidy creates a gap between price paid by consumers and price received by insurers.

• Increases number of insured, but efficiency depends on whether marginal social benefit exceeds willingness/ability to pay.

Vouchers as an Alternative

• Vouchers can be used to buy specified goods (e.g., health insurance).

• Advantages:

  • Can be used with public or private provision

  • Governments can control total value to prevent overproduction

  • Distributes public contribution across many consumers

  • Encourages competition and quality service at lowest cost

Key Equations and Concepts

• Efficient Provision of Public Goods: $MSB = MSC$

• Marginal Benefit: $MB = \Delta TB / \Delta Q$

• Deadweight Loss: Area between MSB and MSC when quantity is not efficient

Summary Table: Classification of Goods

Type of Good	Rival?	Excludable?	Examples
Private Good	Yes	Yes	Food, car, farmed fish
Public Good	No	No	National defense, law
Common Resource	Yes	No	Ocean fish, atmosphere
Club Good	No	Yes	Cable TV, bridge/tunnel

Additional info: These notes expand on the provided slides and text, adding definitions, examples, and equations for clarity and completeness. The tables are reconstructed from the classification scheme described in the materials.