Public goods and the free rider problem-USA

Public goods and their importance to the society -USA

Divy Dangi

Public good is a good that is non-rivalrous, which means that the good’s consumption by one person will not reduce it consumption for someone else. For example, if a person uses a road, it doesn’t reduce its consumption for the other person travelling on the same road. Another characteristic of public goods is that they are non-excludable, which means that it is not possible to exclude anyone from using it. For example, in a public garden, everyone is allowed to enter and it is not possible to exclude anyone from visiting the park. It is a good with positive externalities. That is it provides positive side effects or external benefits to a third party that wasn’t a part of the decision that caused it. The marginal social benefits are more than the marginal social costs for public goods.

However, public goods are underprovided in the market. This is because of the free rider problem that occurs when people consume the public goods without paying for it. The free rider problem is a problem that arises from the non-excludability of the public goods. Since people who do not pay for the good cannot be excluded, the private firms do not produce the good since it would not be profitable for them to do so. Therefore the market fails to allocate resources to their production. Thus, Private markets do not provide some necessary goods and services, such as national defense.

As a result of the free rider problem the government must usually take over the decision about how and how much of these products to produce. In order to allocate the resources efficiently produces the good or it pays private firms to make these products. The payment for these goods are financed out of tax revenues and are made available to the public free of charge. However, it is very difficult, in the case of public goods, for the government to calculate the benefits arising from the public goods because they are provided free of cost to the public. Therefore, the government uses surveys and cost-benefit analysis to decided weather or not to produce the public good or no. If the benefits are more than the costs, then the government provides the good and vice versa. However, calculating the benefits is difficult as people may exaggerate the worth of the good and provide misleading surveys.

Free-to-air describes television and radio services broadcast are broadcasts that allow any person with the appropriate receiving equipment to receive the signal without requiring a subscription. In USA, there are eight major over-the-air or 'free to air’ broadcast networks: CBS, ABC, NBC, Fox, PBS, The CW, My Network TV and Ion. The CBS, ABC, NBC and Fox are called the Big Four since they are the largest of the broadcast networks. PBS (Public Broadcasting Service) relies on financial support from its viewers rather than government taxes and license fees. The CW, My Network TV and Ion are smaller ‘mini-networks’ and have fewer local affiliates than the Big Four and are not available in all areas of the country.

Since free to air broadcasting is a public good, the free rider problem arises here too. The private firms are not willing to provide the good since because of the free rider problem the firms cannot make a profit and people can view or listen to the broadcasting with paying for it. Therefore, to fund themselves and make profits, they advertise on the broadcasting media. However to fix this problem and increase the quality of their broadcasts by reducing advertisements, the free-to-air services fund themselves using other ways. Taxpayer funding is the most common way to fund free to air television. The government provides the private companies funds to run these channels since these channels are used for emergency broadcasts. Some channels enforce a levy of a license fee for transmission and production costs. Some are funded with a voluntary donation for local transmission and production costs (e.g., PBS). Some are also financed using commercial advertising for transmission and production costs and surplus revenues returned to the government (e.g., CBC Television). Some channels turn to Commercial sponsorship of Consumer products and services where part of the cost goes toward television advertising and sponsorship

To make the free to air television more widely available and cheaper the US government provides a coupon-eligible converter box (CECB). It’s a digital television adapter. The subsidy is provided to provide over-the-air television viewers with an inexpensive way to continue receiving free digital over-the-air television services after the nation's television service transitioned to digital transmission.

The use of government tax revenue and subsidies are useful in providing the free to air broadcasting and in correcting the under allocation of this type of broadcasting. However, the use of tax revenue to provide these products leads to opportunity cost. The money used to provide these goods could be used to provide another good that could be more important like free education, free healthcare or national defense. It also creates a larger tax burden on the taxpayers as the government will increase the taxes to fund the free to air broadcasts.

References

http://en.wikipedia.org/wiki/List_of_United_States_over-the-air_television_networks#English-language_American_commercial_over-the-air_television_networks

http://en.wikipedia.org/wiki/Free-to-air#Funding

Public goods and their importance to the society - India

Arjun Goyal - India

The people of the country require certain amenities for living. These amenities have to be provided by the government of the nation. Since these goods are used on a large scale, they have to be made free of cost so that every person can use them, whether rich or poor. These goods are known as public goods. Public goods are characterised by their non-rivalry and non-excludability. This entails that one person’s use of the good will affect the other person’s use of the good, and that no person can be excluded from using this good, since it is so fundamental. Since these public goods have a positive impact on the public (or third party), these goods have large positive externalities.

            Governments have to provide these public goods free of cost because of their fundamental nature and their widespread use. However, public goods have a common feature with other private goods: cost. Public goods are produced at a particular cost, and this has to be borne by the government. Unfortunately, the government has to bear the cost of these goods fully. The funds for paying these costs come from the taxes paid by the people of the country. However, many of the people of the country do not actually pay their taxes.

            This is where the free rider problem arises. The free rider problem of public goods is a cause of its property of being non-excludable. Since public goods are non-excludable, people who do not pay their taxes are not excluded from using these goods. This results in them being the ‘free rider’, subsequently resulting in the cost to be borne by the other people who actually pay their taxes.

            India is a large country, with a teeming population, which is a little above one billion. The government provides public goods to the population of the country on a large scale. Since the production if these goods are on large scale, the free rider problem is magnified, and more number of people starts to become free riders. Thus, the funds of the government have to be redistributed to provide for all the people although only some of them are paying for them. Thus, the government has to start the process of prioritising. Free television channels are put on the lower end of the priority list, with other matters like free drinking water, electricity and roads on the upper end of the list. Thus, the channels like Doordarshan and other news and entertainment channels have to find funding methods of their own.

            These channels have started to allow advertisements to play on their channels in the form of commercial breaks. Since these channels are widely viewed due to their wide availability and free cost, advertisements are sometimes costly, and thus the channel receives large amounts of funds. Doordarshan and many other public channels have many hours of teleshopping advertisements to gain funds for airing shows on the channel. All India Radio also has many advertisements in between songs played, and it gains a lot of its funds from these sources. However, the presence of commercial breaks reduces the quality of content that is played on the channel. This might in turn reduce the number of viewers due to some unhappy customers. However, advertisements are one of the most effective ways of receiving funds for these kinds of public goods.

High quality production of shows makes them more popular. If government channels make high quality shows, they can syndicate them and sell them to other channels where they can be played. The advantage of this is that not only will the show attract more viewers to the channel and bring funds through the selling of the show, but it will also attract newer audiences from the channel where the show is being played. Shows on Doordarshan have been syndicated and sold to other channels. These shows now play on other channels and gain funds and popularity for the channel. However, the costs for producing these shows might be much more than what is gained from selling these shows. Thus, they are not always profitable.

Word count: 681

Evaluating the role of aggregate supply / challenges reforms for economic Growth.

Question 1. Explain how supply side policies can influence the economic activities in a country. [10]

Solution should contain the following content with relevant key terms.

=> Introduction and definition of key terms supply side policies and economic activities.
=> Explanation of Supply side policies and their effect on economic activities.
=> Governments interventionist policies
      => Training and education=> skilled workforce => increases productivity => improving quality and increasing AS=> rise in economic activities
     => improved health care services
     => investment in Research and development
     => improving infrastructure
     => Liberal industrial policies
=> Some market based policies can also be explained:
      => Encouraging competition
      => Labour market reforms
      => Incentive related policies


Question 2: Evaluate what often prevents government from pursuing greater supply side regulating reforms.

Format for the solution

Introduction [ Key terms, supply side regulating reforms, government ]

Points supporting the arguments presented in the question.

Points explaining the limitations of arguments presented

Conclusion (depend on the strength of the arguments presented by you)

=> Introduction: explaining key terms

=> Points supporting why government should favour regulating reforms.

=> Reduces the inflationary pressure

=> Makes market more efficient

=> Increases competitiveness for the domestic manufacturers
=> Incentivising the efficient producers

=> Increase exports and reduce imports as rise in efficiency will lead to fall in average cost of production.  

=> Points that prevents the government to pursue 

=> Impact on government budget => 

=> Adverse impact on equality =>

=> Effects on the environment =>
=> Reduces the power of ruling parties to influence the market =>

=> May increase the power of foreign nations through MNC's => which have adverse impact during              the emergencies.

=> Increase unemployment in short run => seriously limit the prospect of ruling party (democratic countries)  => Social unrest due the militant trade unions => As regulatory reforms will reduce the collective bargaining power of trade unions => social implications if trade unions go violent 

=> Conclusion: Depending you your arguments. 

 

Inequality and income redistribution

Graded Assignment

Grade 12HL2

Evaluate the use of transfer payments and provision of merit goods as policies to redistribute income.  

Due date for submission: Sunday, January 18th 2015 

Inequality and income redistibution

Graded Assignment

Grade 12HL3

Evaluate the use of transfer payments and provision of merit goods as policies to redistribute income.  

Due date for submission: Sunday, January 18th 2015 

Public goods and their importance to the society.

Graded Assignment

Grade 11HL3

Explain how the public goods problem has made it necessary for broadcast media like free to air television and radio to support themselves through advertising. Evaluate what other solutions to this problem has been used in the country allocated to you. 

[Some suggestions: You suppose to explain  public goods, their characteristics, definitions, cost considerations , positive externality. In second part search the country allocated to you and analyse how public goods are provided, evaluate the various ways they are using to finance the public goods.
  
You will be awarded for using appropriate key terms, citations/ references, honesty, appropriate examples.  

Word Count: 300 words minimum

Due date for submission: Sunday, January 18th 2015. Time 11.59PM

Global Warming and Externalities (United Kingdom)

Country: United Kingdom 

Global Warming is the increase of Earth's average surface temperature due to effect of greenhouse gases, such as carbon dioxide emissions from burning fossil fuels or from deforestation, which trap heat that would otherwise escape from Earth. This is a type of greenhouse effect.

To understand the cause of Global Warming, we need to first understand the concept of greenhouse effect. A small part of the heat radiated by the sun is absorbed by the Earth's surface whereas a large part of it is reflected back into the atmosphere in the form of radiations. The atmosphere has greenhouse gases, which absorb this radiation and reflect it back on the earth to keep it warm. Today, due to human activities, the amount of these gases in the atmosphere is increasing as a result of which the temperature of earth is rising and hence we are experiencing global warming.

Use of fossil fuels leads to negative externalities. Many of the environmental problems our country faces today result from our fossil fuel dependence. These impacts include global warming, air quality deterioration, oil spills, and acid rain. Among the gases emitted when fossil fuels are burned, one of the most significant is carbon dioxide, a greenhouse gas that traps heat in the earth's atmosphere and causes global warming. Climate scientists predict that if carbon dioxide levels continue to increase, the planet will become warmer in the next century. In coastal areas, sea-level rise due to the warming of the oceans and the melting of glaciers may lead to the inundation of wetlands, river deltas, and even populated areas. Clean air is essential to life and good health. Several important pollutants are produced by fossil fuel combustion: carbon monoxide, nitrogen oxides, sulfur oxides, and hydrocarbons. In addition, total suspended particulates contribute to air pollution, and nitrogen oxides and hydrocarbons can combine in the atmosphere to form tropospheric ozone, the major constituent of smog. During the electricity-generation process, burning fossil fuels produce heat energy, some of which is used to generate electricity. Because the process is inefficient, much of the heat is released to the atmosphere or to water that is used as a coolant. Heated air is not a problem, but heated water, once returned to rivers or lakes, can upset the aquatic ecosystem. Here the marginal social costs are clearly higher that the marginal private costs, which puts the society at a disadvantage. Although the company is not affected much, the citizens of UK and the world experience problems like global warming which put human existence at a risk.

UK is concerned about the condition of the environment and has implemented laws to limit the amount of negative externality. Some of these are:

•  In 1993, the UK government introduced the fuel duty escalator (FDE), an environmental tax on retail petroleum products. The tax was explicitly designed to reduce carbon dioxide emissions in the transport sector. Since carbon is in fixed ratio to the quantity of fuel, the FDE is roughly approximated as a carbon tax. The transport lobby in the UK was extremely critical of the FDE. The FDE, which was the UK's only "real" carbon tax, failed because of the political criticism it provoked, and the automatic increase of the FDE was cancelled in 1999. Increases in fuel tax have since been discretionary. The politically damaging fuel protests in 2000 contributed to the government decision to reduce the real rates of fuel tax. At the time, tax and duty represented more than 75% of the total pump price. In money terms, the past increments of the FDE remain in force, but in real terms, increments have been reduced by the rate of inflation. In 2006, tax represented about ⅔ of the pump price. 

•  But in current times, Britain's carbon tax will be frozen at 2015 levels of 18.08 pounds per tonne, Chancellor George Osborne said on Wednesday, as a part of the government's annual budget. The move is a downscaling of Britain's carbon price floor, which came into effect in April 2013 aiming to ensure power producers pay at least 30 pounds per tonne for emitting carbon dioxide (CO2) by 2020, to help spur investment in low carbon technology and encourage utilities to switch from burning coal to gas.

•  The EU Emission Trading System (ETS) gives companies from heavy industries and the power sector flexibility to decide whether to invest in carbon abatement or to purchase emission allowances to comply and UK wants to change certain aspects of this system to make it more efficient. Some of them are:

           1 Cancellation of surplus allowances before 2020 to help restore the balance between supply and demand, and put the system back on track once and for all. If not tackled, the surplus will continue to depress the carbon price, delaying the low-carbon investment that is needed now to meet our emissions reduction targets cost-effectively.

            2 Revision of free allowances provisions. The system of free emission allowances, crucial for certain businesses to stay competitive during the transition to a global low-carbon economy, must continue to protect those who need support most to adjust over the long term.

            3 Cutting unnecessary red tape to strike a better balance between fairness, cost-efficiency and simplicity.

•  The British government have announced that significant subsidies will be granted to homes, businesses and schools that are using or converting to renewable heating systems throughout the country. One of the most common methods is a conversion to woodchip burners for heating rather than a continued reliance on fossil fuel heating systems, which of course also provide additional pollutants. The new scheme is to begin shortly with more than £850 million ($1.4 billion US/CA) earmarked over the next four years. It’s expected that most of the subsidized funds will be directed to hospitals, schools and community housing simply due to the size of the equipment involved. Nevertheless it’s a positive and encouraging step by a coalition government who have had their green credentials challenged and selection last year. It’s another step toward the EU target for renewable energy reaching 20 percent in the years to come, although the UK has set a lesser target of 15 percent at present.

Hence, UK in all its power is trying to reduce the carbon emission in the country and it has been successful in reducing the amount as seen in the graph below which shows that UK has reduced its carbon emission from 10 metric tonne in 1986 to 7.86 metric tonne in 2010 which is the lowest of the 3 countries shown in the graph.

Hence international laws such as the EU Emission trading system are very important in preventing global warming as they help eliminate the causes of global warming. It is evident that the EU system has had a huge impact in lowering the carbon emissions in UK and it also has the same effect on other countries. And so the carbon emission in major countries is now decreasing due to such agreements, which force the countries to work in an environmentally friendly way, and also they try to reduce the marginal social costs in comparison to the marginal private costs. 

-Abhijit Agrawal

Bibliography:
http://www.livescience.com/37003-global-warming.html
http://en.wikipedia.org/wiki/Carbon_tax
http://uk.reuters.com/article/2014/03/19/uk-britain-budget-carbon-idUKLNEA2I02620140319
http://www.ucsusa.org/clean_energy/our-energy-choices/coal-and-other-fossil-fuels/the-hidden-cost-of-fossil.html#.VLLYQMaDndk
https://www.gov.uk/government/news/uk-calls-for-major-changes-to-eus-cap-and-trade-emissions-system
http://planetforward.ca/blog/uk-announces-subsidies-for-conversion-to-renewable-heating-sources/