Public Goods and Externalities

There is a distinction between public supply and public finance: Public supply refers to the delivery of a public benefit by government, such as instruction in a government school, which might be privately supplied; public finance refers to government spending on a public good.

A pure public good has the following two properties:

• Nonexcludability: If the public good is supplied, no consumer can be excluded from consuming it.
• Nonrivalry: Consumption of the public good by one consumer does not reduce the quantity available for consumption by any other.

Cohn claims there are four classes of services fit for public administration:

• Services offered to the individual in exchange for some kind of payment.
• Institutional services that cannot be subdivided.
• Services in exchange for payment but engaged by a group and paied for according to ability, not
according to the benefits received.
• Services that are offered to support the needs of one or more classes of citizens.

Impure public goods can be divided into two categories. Some commodities are rivalless but exclusive. The best example is cable television, whose use is non-rival since it has no impact on your pleasure with it. However, by merely refusing to connect you to the system, it is still possible to stop you from viewing cable TV. These types of goods are also referred to as club goods, and the terminology is motivated by the sports clubs where non-members can be excluded from using club facilities. Other commodities, like swimming in a busy beach, rival but are not excludable. When you swim on a packed beach, you detract from the enjoyment of other swimmers, who must now contend with even more people in the sea. However, it would be quite impossible for any community to prohibit people from using the beach. These classes of goods are usually referred to as “common goods,” and the terminology got the name from the landlords alluding to public fields or “commons” where local cattle farmers would graze their cattle. The problem with commons is that they have a propensity to be abused, and the traditional solution is to establish property rights to control access. When common land was enclosed and transferred to local landowners in England during the sixteenth century, this is what happened. The landlords subsequently imposed grazing fees, which decreased usage. In some circumstances like sovereignty over the high seas or air quality, property rights can be challenging to define and enforce. Solely voluntary cooperation is capable of addressing the world’s problems with overfishing, acid rain, and greenhouse gas emissions.

Global public goods are, in theory, no different from local or national public goods. They are non-excludable and non-rivalrous. Free rider issues, spillovers, and short time horizons distinguish them. So, why are there more local and national public goods than global public goods? Why is financing for national military greater than money for tackling global climate change? The answer for these questions are simple. International public goods are different from national public goods, and they have different characteristics. Local and national public goods are often more immediate and directly relevant to individuals within a specific geographic area or country. International public goods, on the other hand, involve a larger scope and can be more complex to manage due to the involvement of multiple countries and diverse interests. Additionally, the existence of political boundaries and national sovereignty can lead to the prioritization of local and national public goods over international ones. Governments are primarily responsible for serving their citizens’ needs and may allocate resources accordingly. Moreover, different regions and nations have distinct priorities and values. This can make it challenging to reach consensus on the provision and funding of international public goods that require cooperation and coordination among multiple stakeholders.

They also have a collective action problem. International public goods often face a collective action problem, where countries may hesitate to contribute their resources if they believe others will not contribute equally. This can hinder the establishment of effective mechanisms to provide and sustain international public goods.

People are equally affected by the amount of missiles chosen as they are public goods. We do not sum horizontally, as we do with private goods (where we total the individual amounts sought at thegiven market price), to determine the market demand for missiles. Instead, we add the prices each person is willing to pay for the given market supply to get a vertical total.

People could have motivations to conceal their genuine preferences for a public good, though. A person can make the false allegation that he doesn’t care about missiles or security. He may still benefit from the security’s comfort and yet have extra cash to spend on tea and coffee if he can convince other persons cover the full expense. A free rider is someone who uses the resources while letting others pay for them. Of course, persons also want to take advantage of others. As a result, the market might not produce as much of the public benefit as is necessary. We refer to this as a “free rider problem.” There is no inherent inclination for markets to achieve efficient allocation.

Free Rider: This individual also enjoys the benefits of the well-maintained park but decides not to contribute anything. They believe that others will cover the maintenance costs and that their individual contribution won’t make a significant impact. Over time, as more people adopt the free rider mentality, the situation unfolds as follows: First month Contributors pay a total of 20 TL, covering only a fraction of the maintenance cost. The free riders enjoy the well-maintained park without contributing. In the following month, a few more people decide to become free riders, reducing the total contributions from contributors even further. In the final month, with more people choosing not to contribute, the burden on contributors increases. They might start to feel that their contributions are ineffective at maintaining the park. As the number of free riders grows, the contributions from the contributors become insufficient to cover the maintenance costs. The park’s condition deteriorates, and eventually, even the contributors may stop paying as they perceive their payments as futile in the face of widespread free riding. As a result, the park falls into disrepair, negatively impacting everyone, including the free riders that initially enjoyed its benefits.

Making decisions about how much of a public good to provide is a hard job for government officials because these theoretical concepts must be translated into hard numbers. In order to carry out this translation, the government evaluates the advantages and disadvantages of public goods initiatives in order to choose whether or not to move on with them. Cost-benefit analysis is essentially accounting exercises that include totalling and comparing a project’s expenses and benefits. Cost-benefit evaluations, however, are actually sophisticated economic exercises that apply microeconomic logic. In other words, Cost-benefit analysis (CBA) is a methodological framework used in economic analysis to systematically examine the desirability of a given project or policy contrasting its related costs and benefits. CBA, which is base  on the principles of welfare economics, seeks to quantify and evaluate these costs and benefits in order to determine in the event that the prospective benefits match the costs. This analytical
method may be used to inform decision-making processes of governments and to maximize resource allocation among competing options.

The process of conducting a cost-benefit analysis entails the following steps:
Identification and Valuation of Costs and Benefits: The initial step involves the meticulous identification, enumeration, and quantification of the various costs and benefits attributable to the proposed undertaking. These encompass direct costs, indirect costs, opportunity costs, as well as tangible and intangible benefits.
Monetization of Costs and Benefits: In order to facilitate their comparability, the diverse costs and benefits are assigned monetary values.
Discounting: Given that costs and benefits might be incurred or realized over time, a discounting mechanism is employed to adjust their values to account for the time value of money. This acknowledges that resources available in the present possess a greater utility than those obtainable in the future.
Calculation of Net Present Value: Net Present Value (NPV) is a financial metric used in investment appraisal and decision-making to assess the profitability of an investment or project over time. It involves calculating the present value of anticipated future cash flows, both positive (benefits) and negative (costs), associated with the investment, and then subtracting the initial investment cost  The resulting value provides a measure of the net financial impact of the investment in today’s terms. The net present value is computed by subtracting the present value of costs from the present value  of benefits. A positive NPV implies that the benefits outweigh the costs, signifying a potentially viable
proposition.
Sensitivity Analysis: Recognizing the inherent uncertainties and variability associated with future outcomes, sensitivity analysis is conducted to assess the robustness of the analysis under diverse scenarios and assumptions.
Social Welfare Assessment: The final outcome of the cost-benefit analysis is indicative of the potential impact on societal welfare. Should the calculated NPV be positive, the undertaking is suggestive of an enhancement to social welfare, while a negative NPV suggests an impairment.

Ethical Considerations: It is imperative to acknowledge that cost-benefit analysis operates within a normative framework and might not comprehensively encompass certain ethical, distributive, and equity concerns. Thus, while a positive NPV might signal efficiency, equity considerations may necessitate further scrutiny.

In a Cost-benefit analysis, benefit list of construction of a new public transportation system in the city centre coluld be:
Time Savings: Commuters will save an estimated some hours annually due to reduced traffic congestion.
Reduced Pollution: The new system is projected to reduce air pollution, resulting in estimated health cost savings per year.
Increased Accessibility: The system will enhance accessibility for people with disabilities and those without private vehicles.
Reduced Traffic Accidents: Anticipated reduction in traffic accidents is expected savings in medical costs and property damage per year.

Externalities occur when the activity of one entity (a person or a corporation) directly impacts the well-being of another in a way that is not represented in the market pricing (since one entity directly influences the welfare of another entity that is “external” to the market). Externalities, as opposed to effects conveyed through market pricing, diminish economic efficiency.

The SMC curve is therefore the PMC (supply) curve moved higher by 1TL0 of marginal damage. That is, for Q1 units of output (point A), the social marginal cost is equal to the private marginal cost (P1) plus 10TL marginal damage (point B).

The private market competitive equilibrium is normally at point A with a production level of Q1 and a price of P1, where demand curve intersects with private cost curve.

Social efficiency is measured in terms of social marginal benefit and cost curves rather than private marginal benefit and cost curves. Because of the negative externality of waste disposal, the social curves (SMB and SMC) cross at point C, with a consumption level Q2. The supply curve understates the costs of manufacturing Q1 to be at point A rather than at point B because the owner of the chemical factory fails to take into account the fact that each unit of chemical production kills fish in the river. Because of the excess chemical productio (Q1 > Q2), the private market equilibrium no longer maximizes social efficiency.

Because of the excess chemical production (Q1 > Q2), the private market equilibrium no longer maximizes social efficiency.
We create a deadweight loss for society when we depart from the social-efficiency-maximizing amount because units are created and consumed for which the cost to society (summarized by curve SMC) exceeds the social benefits (summarized by curve D = SMB). The deadweight loss in our scenario is equal to the area BCA. The number of units for whom social costs exceed social benefits (Q1 - Q2) determines the size of the deadweight loss triangle.

Coa setheorem implies that once property rights are established, government intervention is not required to deal with externalities. Hence the theory relies heavily on two fundamental assumptions: a. Bargaining is inexpensive for the parties, b. Resource owners can identify the cause of harm to their property and legally prohibit further damage.

The Coase theorem argues that the government’s role in dealing with externalities should be relatively specific and limited: creating property rights. If the government can create and enforce property rights, the private market will take care of the rest.

The government may easily achieve internalizing the externality by charging polluting firm a tax of MD (for the marginal damage of the pollution) for each unit of production which creates negative externality.
The government imposes a tax of MD per unit of production. This tax would act as an extra input cost and raise the producer’s private marginal cost for each unit produced. The tax so effectively internalizes the externality and yields the best results for society. The economist A. C. Pigou, who initially proposed this method of addressing externalities, is commonly referred to as the
“Pigouvian taxation” that inspired this sort of corrective taxes.

Turkiye developed its National Climate Change Strategy and Action Plan to outline its goals, targets, and measures for mitigating climate change and adapting to its impacts. This plan includes efforts to reduce greenhouse gas emissions, increase energy efficiency, and enhance climate resilience. Turkiye also signed the Paris treaty in 2022 and implemented some significant policies such as the zero waste programme, as the management and recycling programs to reduce landfill waste and promote sustainable waste disposal practices.

Turkiye is combating smoking with many tools available to the policy makers. Cigarette taxes are implemented in part to counteract this impact and are seen to be the most economical method of reducing cigarette use, particularly among young people and low-income groups. Turkiye has implemented strict smoke-free policies in public places, including indoor spaces such as restaurants, cafes, bars, and public transportation. Smoking is prohibited in enclosed public spaces to protect non-smokers from second-hand smoke. Additionally, cigarette packages in Turkiye feature prominent graphic health warnings covering a significant portion of the packaging. These warnings visually depict the harmful health effects of smoking, serving as deterrents and raising awareness. Moreover, public awareness campaigns are conducted to educate the public about the health risks associated with smoking and to encourage smokers to quit. Also, Turkiye provides smoking cessation programs and services to support individuals who want to quit smoking. These services often include counseling, medication and support groups.