Markets, market failures, externalities, and public goods

Since I can’t be around this week, there are a few things I am assigning to you that will go over the issues of markets, market failures, public goods, and externalities. These assignments are required and will be on our next exam. First please listen to the “cappuccino” podcast and the “lighthouses” planet money podcasts which can be found on the course website. I would like you to all think about how the price system is used to convey information but also the drawbacks of the price system. With many goods there are externalities that cannot be internalized without outside intervention. (You can read about this more in the “Hubbard micro chapter 5” listed on the website.) Public goods fall into the category of a situation where markets can fail. Finally I would like you to watch a video by PBS Frontline called “College Inc.” which discusses the shift from publicly subsidized education and private education. Try to think about education from the perspective of whether or not it is a public good and how it should be provided. Should we be demanding more or less education and how might we reach that goal. We will be discussing this material next week.

5 thoughts on “Markets, market failures, externalities, and public goods”

  1. In the podcast titled “cappuccino” they talk about how a cappuccino is made, all the steps required to make that cappuccino and the prices of that cappuccino. They got this idea from Leonard in 1950s who spoke about a pencil, the $.05 you put towards buying that pencil, where that $.05 is actually going. It goes towards all the labor, the cost of the wood, the eraser, the lead, etc. All of these items make up that price of the pencil. Price is determined from the open market of the items to create that pencil. The planet guys suggest that this is the price system and this is the best way to determine the price of a good. This price system is the symbol of the complex economy and the complex problem when it comes to changing the economy. A system with this complexity will alter our decisions and make them harder. This type of price system makes everything much more complicated.

    The benefits of this type of price system allows you to take into account all the actions of making a good, it puts prices on those actions, combines them, which then creates an overall price for the good. The drawback of this system is that it complex and very complicated. The system is limited to the products to create a good that you can attain from those that you know.

    In the podcast “lighthouse” it talks about how markets provide most of what we need to survive and what we cant get from markets thats what we will get from the government. The government spends their money on public goods which make our economy better and that markets cant supply. The public good that they suggest is a lighthouse. People built lighthouses long before the US government did because they felt they needed lighthouses in order for shipping and direction. This is going against what the planet guys suggest because regardless if the government didnt get involved in the creation of the public good, a lighthouse, peoople would still cast a lighthouse without the governement intervention. Then they go on to say that yes people will still build these lighthouses even if the government didnt get involved but you wouldnt have as many lighthouses in all the places that you would need one. This lighthouse creates a positive externality. From the creation of lighthouses, you not only get the lighthouse, but the many people who would need the lighthouse for guidance, get that guidance, and those that dont need the lighthouse, it doesnt affect them in any negative way. However, inorder to get this public good internalized you need government intervention because with intervention you would have the government spending their money to allow the production of multiple lighthouses all over whereas the market will only provide a few to those who really think they need one, therefore their demand for them is very high and they are willing to spend their own money for this lighthouse. Therefore, inorder for lighthouses to have externalities that can be internalized, the government needs to get involved. The government in this case is the outside intervention.

    A public good is something that the government involves themself with the creation of a certain good because the market wont provide that good. When you look at education, there are many ways to look at it. When you look at primary and seconday education, like K-12, yes that type of education can be a public good. You attend your public schools and you dont have to directly pay for it. The government pays for it, regardless of your tax dollars, no extra money is spent for you to get educated up until the 12th grade. The government is monitoring and providing the primary and secondary education for you. Many people wouldnt be able to attend school had the government never intervened. Like the lighthouse example, had the governemnt not gotten involved, there would only be a few lighthouses. With schooling until grade 12, had the government not intervened, only few would attend.

    When you look at education beyond grade 12, and you look at college or post secondary education there is an argument to whether that education is a public good or not. The governement does provide money for colleges so that they can succeed and if theyre lucky, give funds to some of the students attending, but thats only for a publically funded college. Privately funded colleges, the colleges gain their funds from wealthy alumnis, others that are willing to invest their money in those colleges, and the very expensive tuition. Wealthy alumni invest into public schools as well but public also has the help of the government. From this, private colleges are definitely not a public good. You pay to go there with 0 help from the government, not including if you are applicable for financial aid. Public colleges on the other hand, you do gain some help from the government but not enough. JMU for example. im an out of state student therefore I pay twice as much to attend this school and my family still pays taxes. The taxes my family are paying arent helping with my education as much as they did in K-12. So i am paying more like triple to attend this college. Many people do not attend colleges because of the price to do so. The government doesnt help enough in the circulation of college as a good so that everyone can attend like they did for students in K-12. Therefore, I feel that Public colleges are also not a public good. If they were more people would be able to attend. Community college is another option to look at. Those who cant afford private or public colleges attend community college. But then theres the question if your experience and education you get at a community college is the same quality education that you receive at a public or private college. Community college is significantly cheaper because of the money that the government puts into it and the less demand that consumers have for it. The last option someone would chose would be to attend community college in my opinion. But the community is what makes this college a more of a public good.

    Now a days in order to get a job you need to attend college and do well in it. Due to the lack of funds and government intervention, many people are unable to attend college. The demand for education is high already, it should be higher but those who know they cant afford it dont demand it and go on in hopes of being able to get an ok job with a high school diploma.

    In order for the demand for education to grow we dont need a greater supply of education, we need to make education more of a public good with more government intervention. Education itself is a positive externality so having an educated population will do nothing but make our society stronger and smarter so therefore the government should rearrange their funds so that they can provide more money to those who attend college, the same to the colleges itself, so that the quantity demanded for an education beyond highschool can equal the quantity supplied education and there can be an equilibrium. Right now, the price is too high to fit the demand so there is a surplus of education, in my opinion.

  2. I think it is interesting that for profit institutions are able to charge tuition rates higher than traditional universities. One would think such a high price would cause less of a good to be demanded; however, it seems to me that something else here is at play since this is not so.

    As discussed in the video, these universities are using deceptive tactics similar to those used in sub-prime lending. People are taking loans out which they cannot afford, and are tricked into doing so by tampering with their emotions. Can this explain why the high price has not deterred consumers? I think so.

    That being said, I don’t believe that for profits are necessarily bad. I just believe they should be regulated so that only those who will be able to pay their loans off can attend the colleges.

    I hope that the department of education can be successful in regulating this industry. If not, the US government is going to have to hold the full burden of the defaults since the student loans are held by the government and not other financial institutions or investors like with mortgage backed securities. Perhaps a solution to this issue is to no longer permit US student loans to students at for profit colleges, and put the responsibility of making loans on the investors who are running the colleges. However, I am not sure they will see it as such a sound investment. Which if that is the case, no one including the US government should be making these loans.

  3. In podcast called about cappuccino’s the ideas of different price systems are brought up. Our market systemis that of a capitalist one and not of a communist one. So essentially when we make something like a cappuccino all the profits earned are then divided up among all those who contributed in making that product. The prices of these items communication information to the public, economy, and government. Prices cordinate how a free market works. If there is a need for soemthing the price system sorts it all out. Everyday when we as consumers buy soemthing we add our own say into this price system by driving up or down the relative value of a product.

    I too agreed with the special economist they had on the show about this idea of a pric system and how all of it can effect a product like a cappuccino. Yes, the price system keeps everything in line, but its so complicated, and only proves how complex our world and economy has become. If we ever decided to change our system, for whatever reason, it may be very complicated and hard to adjust to, due to the fact that everyone is so set in this way and has been for so long. In addition, it would be complicated because since its already so full of “stuff” its hard then to subtract those ideas or “stuff” about how the system works and still have it work in a different way, because we’ve enforced so many rules and regulations for one way. Although, this is not to say that our system does not have its benefits. As mentioned in the podcast, the example of the pre and post Industiral Revolution have their differences. Prior to the Industrial Revolution we had such a simplier system but it also meant that poorer people could not recieve as much because there was no major trade or buying/selling, so what you had in your immediate area was what you got, which cause porblems sometimes. Yet today the down side to our system is that we now are victims of decisions people are making far away. We have the system we have today and it is obviously working we just need to better understand it and embrass the fact that it socmplex inorder to work with it and enhance it.

    Price system can also be seen in the video baout lighthouses. This public good and its spending, whether it come from the government or not, is sending information about the spending of it into the price system, which then spits back out how and where the money for it should continue or not continue to be spent. I agree that yes spending should be divided up, like is now, but I also believe the view that economists have on it about what should and should not have money spent on it should be encorporated. The money should be divided up after the fact that the government has then decided what the money should or should not be spent on. I do believe governments should provde things a market cannot, but I dont always think thats the case. With the education video, I am not sold that education is a public good, there are aspect and qualities that fit into that category, so therefore it should recieve some funding, just like other thigns that are clean cut, they should recieve help from the government. A lighthouse and a school make the peoples lives better around them. And both cannot exclude people from using them. although, in the case of a private school, it is then not a public good because they can exclude people by religion or cost of the school, or sometimes by interviewing a student to see if they would “fit in” at the school. Yet, when solely looking at public school the viewpoint in much different. The reason why I believe public school is not a public good is the fact that I do believe there are marginal costs, yes everyone may benefit, but thre are some additional costs for people. When you look at the supplies both teachers and students have to pay for to create a successful education, then it may not be a public good, just as how some argue that the postal service has additonal cost for stamps. (Although someone could say that the supplies in both situations are parts of the school or postal service so dont count, others could argue against this) In additon one could argue, from a teachers stand point, can you say the time put into providing a good learning environment is a marginal cost? Because to me someones time is worth money, and the teacher may not see themselves as benefiting, but the studetns are so not everyone then is benefiting. but yet that brings up another point, do we consider what people see as “beneficial” as an aspect, or is there a universal idea of what a benefit is that is not effected by someones personal ideas? I think since there is question about this it makes a school not a public good. But from someone going into the teaching proffesion, I wouldnt want the government to cut my spending because I believe its neccessary to have government help, in fact I think we need more governement help. If teaching got more money, more new ideas and way of learning could be explorded that apply and help different kinds of kids and thats a benefit. With the case of the lighthouse, yes there is not question as whether or not it a public good, because it meets all of the criteria.

  4. The price system is a very complicated system. When a good or service is provided, there are many factors that have contributed to the ability of that good/service to be created that might lie hidden. When making a cappaccino, there is no way a single person would be able to make a cup by themself as you need the milk that comes from dairy farmers, plastic, machines that include steel, the actual coffee beans, etc. All of these pieces contribute to the production of the good. When a person purchases this good, the price not only goes back to the person who directly sold you that good, however it will distribute back to the millions of people whose efforts put together made that 1 good. The price of a good is determined by each person’s decision and demand for that good as well as the willingnes of the firm to supply the good. In other countries, the market good was determined how much was made and who would receive that good through one person which is very inefficient. Even communists are starting to turn to thinking that the price system is a better process than their central planning. However, when a problem arises in the price system it provides a drawback as it is hard to solve the problem without truly understanding the price system’s complexity.
    Lighthouses were a great example of the externalities. A benefit or cost may affect someone even if they are not involved in the production or consumption of a good or service. Lighthouses were first built in order to provide lighting and guide the way for ships to come into the port. While these lighthouses were first created by the towns the ports were in, the only way that these lighthouses could be built was if the town had enough money to build it. However, the government stepped in and was able to provide the lighthouses-which may affect someone although they are not involved in the actual production/consumption – in more places while saving the towns and individuals their money. Without the government intervening, the lighthouses would not be internalized and the market (or towns) would not be able to provide the lighthouses in all places they are needed.
    Education is sold as a public good. The idea that education does not exclude anybody and benefits society as a whole is an idea spread through every mind. However, with a closer look, education can be questioned to whether it really is a public good. At first glance, college education is offered on many different levels whether its attending a four-year college, community college, or an online college. When students are first approached, many for profit schools emphasize the need for a college diploma, drag students into thinking that a college diploma will fix all problems, and provide ways for students to pay for college even if they are not ready and could not afford their tuition- through loans. After the students finished their college and received their diplomas, many found that they were in debt that they did not know they were accumulating, and they were not warned beforehand when they signed that the outcome would add up to as much as $100,000s. When we take a closer look, we see that people who cannot afford the tuition, who may not have the opportunity to go to college, and who are tricked into going yet are later found to be in debt that is over their heads, this shows that people can be excluded or would have been if they were fully aware of what they were getting themselves into. I believe we should demand more of education as it is crucial if one wants to succeed at this day in age. We need to look at the differences between nonprofit and for-profit colleges and just as the department of education is doing right now look to place regulations on the for-profit colleges.

  5. The free market works depend on the prices, prices all have information. The treasury bonds which the government pays within 10 years information of if the economy is doing on a good or bad direction. If the interest rate the government pays more money to borrow money it means that it will take us long time to pay for the money that we are borrowed. During the crisis, people bought Treasury bond because they do not trust any other markets and they do not care about the interest that they will get. And they put the money on stock market which is they think they demand high interest. It will help for the economy to increase.
    The economist use stories for understanding about the world economy works, “Cappuccino” which is the simple object which no one can make it from scratch. It is made from milk, coffee, cup which is made from recycle plastics, and espresso machine. This is the reason that no one in the world can make cappuccino from scratch. The other economist was Leonard in 1958 who spoke about pencil. He was worried about the communism at that time and he said that “this pencil is a capitalist pencil; it is not a communist pencil.” These examples, both cappuccino and pencil are the main selling points of capitalism.
    Public good which we all need in our life and the market cannot afford it. But it can only provide by the government which is called light house. I agree that the spending should be divided like; on public health problem, defense spending. Education is sold as a public good. Education is the question that if is a public good. Students who attend colleges if it is a four years, or graduate school, students who attend to these schools are first attracted by the diploma that they will get after graduation which can help them to change their life, but they do not see the money that they are taking from the loan which if they can afford it or not. This is the other reason of choosing the institutes if they are non – profit or are profit.

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