PUBLIC, COMMON POOL, TOLL GOODS, AND THE MARKET

(c) Charles J. Spindler 1995

ASSUMPTIONS OF A PURE MARKET ECONOMY

• complete and free exchange of information

• exchange is without transaction cost

• actors are price takers - consumer sovereignty

• markets exist for all goods

• no externalities

• no collective goods

• individual rights including property rights

• many buyers and sellers

• free entry and exit

• increasing costs in all industries

  • no natural monopolies

• competition

  • no monopolies

• laissez faire government

REAL ECONOMY

• the economy is mixed; there is no pure market economy

• the correct size of public/private economy is a political issue

TYPOLOGY OF MARKET FAILURES

• Monopoly

• Spillovers - negative and positive

• Lack of profit for some goods - restricts production by market

  • public goods and merit goods

  • the free rider problem

  • exclusion principle

• Multiple use of a good - restricts production by market

  • exhaustion principle

  • tragedy of the commons

• Merit Goods - exhaustion and exclusion feasible, but "society" desires more production of good than produced by private sector

• Lack of Information in the Market

• Transaction Costs

                         Exhaustion

                    Single Use               Joint Use

Feasible  |    Private goods       |    Toll goods
          |                        |
Exclusion |-------------------------------------------
          |                        |
Not       |    Common Pool         |    Public 
Feasible  |    Resource            |    Good

Exhaustion - single or joint use

Exclusion - restricted to people who pay producer

Private good - single use; restricted to people who pay

Toll good - joint use; restricted to people who pay

Common pool good - single use; not restricted

Public Good - joint use; not restricted

Merit Good - good with positive spillovers which is underproduced by market

Market Failure and the Second Best Solution

Public sector production, subsidy, regulation

• large spillovers and non-uniform distribution

• spillovers create inefficiencies in the market because they are not internalized by the individual creating or consuming

  • education - the market produces less than socially desirable.

  • pollution - the market produces more than is socially desirable.

• contracts and the legal system require government legal structure.

  • government regulation and other measures needed to secure free entry into the market and full market knowledge.

• natural monopolies/oligopolies

  • antitrust regulation, public ownership, and public regulation.

• absence of markets - unemployment insurance; national defense

• the market system may not bring high employment and price level stability.

• social values