30.1 External Benefits and Public Goods

• The benefits of consumption are confined to the person who buys the goods.

• The benefit experienced by a buyer is called a private buyer.

• An external benefit is a benefit from a good experience by someone other than the person who buys the good.

• Consider a dam built for flood-control purposes.

  • One thousand people would be protected by the dam, and each person would get a $50 benefit.

  • If one person builds a dam, the private benefit is $50 and the external benefit is $49,950, or $50 for each of the 999 other people who benefit.

  • If the cost of building the dam is $20,000, no single person will build it because the cost exceeds the $50 private benefit.

  • In other words, if we rely on supply and demand, with each person considering only the private benefits and costs of the dam, it won’t be built.

• A public good is a good that is available for everyone to consume, regardless of who pays and who doesn’t; a good that is no rival in consumption and non-excludable.

• A private good is a good that is consumed by a single person or household; a good that is rival in consumption and excludable.

• A free rider is a person who gets the benefit from a good but does not pay for it.

30.2 Private Goods with External Benefits

• Some private goods generate benefits for people who do not directly consume the goods.

• Education is a private good that generates external benefits.

  • Most of the benefits of education go to the student because education increases productivity and income, presumably, it makes everyday life easier and more interesting.

• Education generates three kinds of external benefits:

  • The workplace externalities where in workplaces, people work in groups and teamwork is important. Higher productivity generally leads to higher profits for firms, and members of the team are likely to earn higher salaries.

  • The civic externalities are where citizens in a democratic society make collective decisions by voting in elections, and each citizen must live with these decisions. A well-educated person is more likely to vote intelligently, so there are external benefits for other citizens.

  • The crime externalities where educated people earn higher legal incomes and thus commit fewer crimes. High school dropouts have relatively low wages and high crime rates, so increasing the high school graduation rate generates a large reduction in crimes.

30.3 Public Choice and the Median Voter

• Public-choice economics is a field of economics that uses models of rational choice to explore decision-making in the public sector.

• A median voter rule is the choices made by the government that will match the preferences of the median voter.