Nonmarket allocation, government, and public choice

Market failure occurs when, market forces are unable, by themselves, to bring about efficient allocation of resources. Public goods are goods that cannot be efficiently allocated by markets because exclusivity of consumption and withholding from nonbuyers are impossible; government must provide such goods. Externalities represent another common kind of market failure that is sometimes redressed by government. Externalities are costs and benefits of economic activity that do not enter into the firm's own calculations of costs or revenues. Thus, in the absence of some sort of non-market correction (usually governmental action), they lead to inefficient allocation of resources.

In an unregulated economy, price is the mechanism that allocates and determines what, and how much of it, will be produced. However, most of the world economies include some level of government regulation and influence. Some of this influence is designed to allocate resources in ways different from the way in which the price system would.

Government redistributes resources by collecting taxes and spending or paying the money to persons different from those who paid the taxes. Examples: social security and medicare. Sometimes government also steps into a price-driven markets for the express purpose of changing the manner in which its goods and/ or inputs are distributed or priced. Price controls limit the extend by which prices can rise or fall in particular markets. Marketing controls limit the supply that firms can provide in the market. The price system is powerful; when government tries to overcome it, black markets often appear. Black markets are illegal price-driven markets that exist to get around governmental controls. Subsidy occurs when government makes direct or indirect payments in order to encourage certain forms of production and/or consumption.

Public goods. Public goods, also called collective goods, are goods that cannot be allocated efficiently by market forces. Their nature is such that if they are made available to anyone, they become available to everyone (or, at least, very many others).

Private goods can be withheld if no payment is made — if you do not pay for it, you do not get it. Also, consumption of private goods is exclusive — if I buy something, it is mine and I get to enjoy it all to myself. On the contrary, public goods cannot be withheld from

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nonpayers. One person's consumption of, or benefit from, a public good does not reduce anyone else's consumption. Examples of public goods are many of things provided by government: police and fire protection, national defense, etc. For goods such as these, if they are provided at all, they benefit everyone. It is all but impossible, for example, to provide the protection of national defense privately. In order to protect adequately those who would " buy" it, protection has to be extended to everyone, and there is no way to keep " nonbuyers" from benefiting from it. Public goods cannot be supplied by firms operating in conventional markets because there is no way for the firms to enforce exclusivity or withhold supply from nonpayers. Government is the significant supplier and usually uses measurement of costs and benefits to determine what, and how much, to provide.

The cost-benefit analysis is the method to determine the kind, allocation, and quantity of public goods (and sometimes the taxation methods used to pay them). It is the analysis of the social costs and benefits of producing and distributing them. Once social costs and benefits have been determined, they are compared. If benefits exceed costs, it is worthwhile to provide the public goods in question, because the population as a group receives more from the good than they pay to get it. Likewise, if costs exceed benefits, the public good should not be provided.

While cost-benefit analysis looks good on paper, in the real world serious difficulties are encountered in identifying costs and benefits and setting a value upon them.

Example: Existing roads in a certain area are congested and unsafe. The government considers building a new superhighway to handle much of the traffic load.

Direct costs include land, construction, future maintenance, etc. Other costs include local auto pollution, dislocation of homes and businesses to make way for the road, losses to remaining businesses due to lower traffic, etc.

Benefits include easing congestion on existing roads, greater efficiency in travel (saving time, saving fuel due to reduced stop-and-go driving, etc.), fewer accidents due to the safer road, less future congestion, increases in land values along the new road due to better accessibility, etc.

Many of these costs and benefits will accrue in " the future and are hard to predict accurately. Also, only a few costs and benefits are mentioned here; the actual list is almost endless. You can think of several more yourself.

Public choice refers to the manner in which government decisions with regard to resource allocation are made. Public choice economics is the study of these decisions and their relationship to the efficient allocation of resources. Because of its nature, public choice is beset with problems in the determination of voters' wants, and efficient allocation of resources.

P olitics. A central problem of public choice is that the benefits of many government policies are concentrated while their costs are spread thinly and not easy to identify. Politicians can appeal to various special-interest groups and get their votes, knowing that most voters will be unable to tell how much such pandering actually is costing them. The result is that special interests often can elect politicians who will see to it that their interests are served, even though doing so is clearly economically inefficient.