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PUBLIC ECON  Karl Marx: Advocated for a greater state role in production and criticized INTRODUCTION TO PUBLIC ECONOMICS private ownership. GOVERNMENT AND ST...

PUBLIC ECON  Karl Marx: Advocated for a greater state role in production and criticized INTRODUCTION TO PUBLIC ECONOMICS private ownership. GOVERNMENT AND STATE: OVERVIEW  Robert Owen: Suggested cooperative groups as an alternative to both state GOVERNMENT control and private enterprise  Commonly defined as the governing 20TH CENTURY: power of the state  Most common form is democracy  Capitalism vs. Socialism: Became where the exercise of power is subject central to global politics, particularly to the periodic consent of the people during the Cold War, with contrasting through right to suffrage ideologies about government control versus free enterprise. 18TH CENTURY  Transition of Soviet Union & Eastern  Mercantilism: One dominant view in Bloc: Movement from state- the eighteenth century, which was controlled economies to market particularly persuasive among French economies, reshaping the role of economists, was that the government governments. should actively promote trade and  Gradual Evolution in the U.S.: industry. Government's economic role evolved  Adam Smith’s Response (1776): In slowly in response to key events the Wealth of Nations, Smith argued throughout the century for limited government intervention, 21ST CENTURY showing how competition and the profit motive would naturally serve  Debate Over Government Role: the public interest. Ongoing discussions about the balance between market systems and 19TH CENTURY government involvement, with  Laissez-Faire Doctrine: Promoted by differing national models (e.g., economists like John Stuart Mill and Northern Europe vs. U.S.). Nassau Senior, advocating for  2008 Financial Crisis: Highlighted the minimal government interference in need for government intervention in the private sector, believing that free saving economies, raising questions competition best serves societal about the limitations of private interests. markets. Criticism and Alternative Views: Issues ECONOMIC ROLE OF GOVERNMENT like income inequality, poor living  Redistribution: Provision of social conditions, and unemployment led to welfare criticism of laissez faire principles. → alleviate poverty and reduce inequality  Stabilization: macroeconomic management R.M.B  → price stability, employment, fiscal APPLICATIONS OF ECONOMIC PRINCIPLES TO discipline PUBLIC SECTOR  Allocation: response to market  Scarcity and Opportunity Cost inefficiencies  Value of Trade GOVERNMENT FAILURES  The Role of Incentives  The Role of Prices  Limited Information: government  Principles of Efficient Production doesn’t have the information required  Working with Markets to do what it would like to do  Social Welfare  Limited control over private market response: government has limited  Rational Decision Making control over the consequences of its WHY STUDY PUBLIC ECONOMICS? actions.  Limited control over bureaucracy: There are at least 3 big sets of reasons why you delegation of authority should study Public Economics:  Limitations imposed by political 1. as a citizen processes: difficulty in the 2. as a future practitioner implementing government policies 3. as a student WHAT IS PUBLIC ECONOMICS EFFICIENCY, MARKETS AND GOVERNMENTS Public economics focuses on answering two POSITIVE ECONOMICS AND NORMATIVE types of questions: ECONOMICS 1. How do government policies aspect A. POSITIVE ECONOMICS the economy?  Scientific approach to analysis that 2. How should policies be designed to establishes cause-and- effect maximize welfare? relationships among economic THINKING LIKE A PUBLIC SECTOR variables ECONOMIST  Attempts to be objective  Formulates "If... then" hypotheses They inquire into four central economic that can be checked against facts questions:  Useful to the normative approach in 1. When should the government that it cannot make intervene in the economy? recommendations to achieve certain 2. How might the government outcomes without an underlying intervene? theory of human behavior 3. What is the effect of those  Objective and Factual interventions on economics B. NORMATIVE ECONOMICS outcome?  Designed to formulate 4. Why do governments choose to recommendations as to what should intervene the way they do? be accomplished  Not objective (Prescriptive) R.M.B   Begins with predetermined criteria  The efficiency criterion is satisfied and is used to prescribe policies that when resources are used over any best achieve those criteria given period of time in such a way as  Useful to the positive approach in that to make it impossible to increase the it defines relevant issues well-being of any one person without reducing the well-being of any other Positive analysis: What are economic effects person, of government programs and interventions:  Developed by the Italian economist primarily empirical. Vilfredo Pareto (1848- 1923), it is Normative analysis: What should the often referred to as the criterion of government do? When should it intervene, Pareto optimality. The criterion and what is the best way to intervene (best represents a precise definition of the amount of intervention)? At what level should concept of efficiency. government intervene? FIRST THEOREM OF WELFARE ECONOMICS WELFARE ECONOMICS IF: All consumers and producers act as perfect  Welfare economics is the branch of competitors (no one has market power) economics that focuses on normative AND: A market exists for each and every issues. commodity  The theory concerned with the social desirability of alternate economic THEN: Resource allocation is Pareto Efficient. states and policies. Equilibrium = Perfect Competitive that is  To include society's value of Pareto Efficient commodities under alternative resource allocations directly involves A PERFECTLY COMPETITIVE MARKET SYSTEM welfare economics. EXIST IF:  Studies all feasible allocations 1. All productive resources are privately of resources for a society owned.  Establishment of criteria for 2. All transactions take place in markets, selecting among these and in each separate market many allocations competing sellers offer a standardized It deals with such variables inter alia; product to many competing buyers. 3. Economic power is dispersed in the  Allocation of resource sense that no buyers or sellers alone  Consumer surplus can influence prices.  Producer surplus 4. All relevant information is freely  Total surplus available to buyers and sellers.  Dead weight loss 5. Resources are mobile and may be  Consumer behavior freely employed in any enterprise.  PCC, ICC, Edge worth curve THE EFFICIENCY CRITERION: ANALYZING ECONOMIC EFFICIENCY R.M.B  1. Productive (Technical) Efficiency Pareto Efficiency: A Pareto-efficient task  Producing the maximum output of allocation would assign Sarah to Task A and goods from given resources. John to Task B, where both are performing  Allocation of resources is technically tasks, they are best at. Switching tasks would efficient if it is possible to Increase the make at least one of them perform worse. output of one good without Explanation: Any change to this allocation decreasing the output of another (e.g., Sarah switching to Task B) would reduce good. overall productivity without improving the 2. Consumption (Exchange) Efficiency outcome for both.  Goods are allocated to the individual who want them. 3. Product Mix (Overall) Efficiency  Firms produce the goods that people Traffic Flow and Road Usage want when available production Scenario: Consider a city with a set of roads technologies. and a fixed number of drivers. Each driver EXAMPLE: wants to minimize their travel time, but more cars on a road increase congestion. Two-Person Economy (Simple Exchange of Goods) Pareto Efficiency: If no driver can switch to a different road to improve their travel time Scenario: Imagine two people, Alice and Bob, without making another driver worse off (i.e., each with different goods. Alice has 10 apples, increasing congestion for others), the traffic and Bob has 10 oranges. Both want a mix of flow is Pareto efficient. apples and oranges. Explanation: Any change would increase the Pareto Efficiency: If Alice and Bob trade travel time for at least one driver. apples and oranges to a point where neither can increase their utility without making the EFFICIENCY ≠ TO FAIRNESS other worse off (e.g., Alice has 5 apples and 5 If Pareto Efficiency was the only concern, oranges, and Bob has 5 apples and 5 oranges), competitive markets automatically achieve it the outcome is Pareto efficient. & there would be very little need for Explanation: If Alice were to get more apples, government: Government would exist to Bob would have fewer apples or oranges, protect property rights making him worse off, and vice versa.  Eg. Laws, Courts, and National Defense But Pareto Efficiency doesn't consider distribution. I.e., one person/party could get Job Allocation in a Firm all society's resources while everyone else starves. This is not typically socially optimal. Scenario: In a small company, two employees, Sarah and John, are assigned tasks. Sarah is SECOND THEOREM OF WELFARE ECONOMICS great at Task A but average at Task B, while John excels at Task B but is mediocre at Task A. First Welfare Theorem: Under certain conditions (perfect competition, no R.M.B externalities, and complete information), with the basic resources they need to improve every competitive equilibrium is Pareto their long-term wellbeing This allows more efficient. individuals to participate in the economy and contribute to economic efficiency, while also Second Welfare Theorem: Any Pareto promoting social equity. efficient allocation can be achieved through a competitive equilibrium given a suitable Efficiency: By investing in the education and redistribution of wealth This indicates that health of children, 4Ps builds human capital, social welfare can be maximized through which increases long-term economic competitive markets with appropriate productivity. When people are healthier and redistribution mechanisms. better educated, they are more likely to contribute effectively to the labor market, The Second Welfare Theorem demonstrates leading to a more efficient use of resources in that markets can achieve both efficiency and the future. equity with suitable redistribution mechanisms. By redistributing wealth through Equity: The 4Ps program directly addresses taxes, subsidies, or policy interventions, inequality by providing cash transfers to poor governments can correct initial inequalities households, ensuring they have access to while maintaining the efficiency of education and healthcare This reduces competitive markets. These examples show poverty and improves the quality of life for how real-world policies implement the idea of marginalized communities. redistributing resources to ensure fairness, RICE TARIFFICATION LAW AND CASH without sacrificing the benefits of efficient ASSISTANCE TO FARMERS market outcomes. Situation: Rice farmers in the Philippines face EXAMPLES: challenges due to competition from cheaper PANTAWID PAMILYANG PILIPINO PROGRAM imported rice, which threatens their (4PS) livelihood Situation: Many low-income families in the Redistribution: Under the Rice Tariffication Philippines lack access to essential resources Law (Republic Act No. 11203), tariffs on like education and healthcare, which limits imported rice were introduced, with the their ability to participate in the economy. revenue generated from these tariffs used to provide financial assistance, subsidies, and Redistribution: The 4Ps program is a support services to local rice farmers Through conditional cash transfer program that the Rice Competitiveness Enhancement Fund provides financial aid to poor households (RCEF). Families receive cash grants in exchange for sending their children to school ensuring Result: The redistribution of tariff revenues to regular health check-ups, and attending family support local farmers helps improve their Development sessions. productivity and competitiveness. This allows farmers to remain part of the market Result: By redistributing wealth through economy, improving efficiency in rice government funds (collected from taxes), 4Ps production while ensuring fairness by helps alleviate poverty and provide families R.M.B protecting local farmers from being displaced active, which improves labor efficiency and by cheaper imports. reduces long-term healthcare costs. Efficiency: By providing farmers with Equity: The Universal Healthcare Act ensures resources to improve productivity (e.g., new that all Filipinos, regardless of income, have equipment, seeds), the program increases the access to essential healthcare services. This efficiency of rice farming in the Philippines. It promotes fairness by reducing disparities in allows farmers to compete more effectively, health outcomes between rich and poor. improving overall agricultural productivity and EFFICIENCY vs EQUITY market efficiency. EFFICIENCY - is the distribution and allocation Equity: The revenue from rice Import tariffs is of resources with minimal waste or losses of redistributed to small farmers, helping them the resource used. compete with cheaper Imports and improving their economic situation. This redistribution EQUITY - this refers to the situation of the helps protect the livelihoods of poorer economy in which the proportion of resources farmers, promoting equity. distributed is considered fair among the economy. UNIVERSAL HEALTHCARE ACT TRADE OFF EQUITY AND EFFICIENCY Situation: Many Filipinos, especially in rural or low-income areas, lack access to healthcare,  Due to the distinct nature of limiting their productivity and participation in government policies, the aims of the workforce. equity and efficiency often creates conflict. Redistribution: The Universal Healthcare Act  Given the pros and cons of (Republic Act No. 11223), signed into law in government policies, the process of 2019, aims to provide all Filipinos with arriving at correct trade-off between equitable access to quality healthcare equity and efficiency is required in services. The program is funded through taxes drafting and implementing the and contributions from both employers and policies. employees under the PhilHealth system.  Policies that aim for maximum Result: By redistributing wealth through taxes efficiency may lead to inequitable and health contributions, the government outcomes. For instance, a focus on ensures that everyone, regardless of income, maximizing output may result in has access to healthcare. This improves the significant disparities in income and overall health and productivity of the wealth, with some individuals population, leading to a more efficient benefitting greatly while others are economy while ensuring fairness in access to left behind. healthcare services.  On the other hand, efforts to promote equity, such as progressive taxation or Efficiency: A healthier population is more extensive welfare programs, can productive and incurs fewer costs from sometimes reduce overall economic preventable diseases. Universal healthcare efficiency by disincentivizing ensures that workers remain healthy and production or investment. R.M.B EXAMPLE 1 allowing the poor to gain without taking resources from the wealthy. For example, The government is considering two policy investing in education or job training options: programs can increase the productivity of low- Policy A: No changes are made to the current income individuals, helping them earn more allocation of resources, which is Pareto without directly redistributing wealth. This efficient but leaves significant income could improve both overall economic inequality. efficiency (since more people are contributing to the economy) and equity (by reducing Policy B: A redistribution policy that decreases income disparity over time). Income Inequality but is not Pareto efficient because it makes wealthier individuals worse EXAMPLE 2 off. Suppose a government is tasked with Task: redistributing Income between two individuals, one very wealthy and one very 1. Which policy would you recommend if the poor. goal is to prioritize Pareto efficiency? Assume the following income levels: If the goal is to prioritize Pareto efficiency, I would recommend Policy A, as it maintains Wealthy Person has P100,000. the current allocation without making anyone Poor Person has P10,000. worse off. Pareto efficiency focuses on ensuring no one can be made better off The government can take P20,000 from the without harming others, so any redistribution wealthy individual and transfer it to the poor would violate this principle. person, resulting in the following: 2. Which policy would you recommend if the Wealthy Person now has P80,000. goal is to prioritize equity? Poor Person now has P30,000. If the goal is to prioritize equity, I would 1. Is this redistribution Pareto efficient? recommend Policy B because it reduces Explain why or why not. income inequality by redistributing wealth. This policy may harm wealthier individuals This redistribution is not Pareto efficient slightly, but it creates a fairer allocation of because the wealthy person is worse off resources and helps reduce poverty or income (losing P20,000) while the poor person is disparities. better off (gaining P20,000). Pareto efficiency does not concern fairness, but rather whether 3. Can the government design a policy that one person's situation can improve without improves both Pareto efficiency and equity at worsening another's. the same time? 2. Discuss the impact of this redistribution on Improving both Pareto efficiency and equity equity. How does this affect the fairness or simultaneously is challenging but not equality between the two individuals? impossible in some situations. One possible solution could be economic growth policies Impact on equity: The redistribution Improves that expand the total wealth available, equity because it reduces the Income gap R.M.B between the wealthy and the poor. The the funding gap between the two schools, redistribution enhances fairness by providing students in School B can have access to better the poor person with a more substantial educational opportunities, reducing income, which may align with societal goals of inequality. Though not Pareto efficient, it reducing inequality. Although it is not Pareto increases fairness in the allocation of efficient, it could be seen as a more equitable educational resources. distribution of resources from an ethical or EXAMPLE 4 social Justice perspective. Consider a small town with two families, EXAMPLE 3 Family A and Family B. The town has two Consider a scenario where a government houses available: funds two schools, School A and School B. House 1: A large, luxury home. School A is in a wealthy area, while School B is in a low-income area. The government is House 2: A small, modest home. considering redistributing funding to reduce the gap in educational quality Initially, Family A, which has high income, lives in House 1 (the large, luxury home), and Initially, the funding is: Family B, which has low income, lives in House 2 (the small, modest home). Both families are School A receives $1 million in funding satisfied with their current living situations. School B receives $300.000 in funding. No further trade or reallocation of houses can make either family better off without making The government is considering redistributing the other worse off. $200,000 from School A to School B, so the new funding is: 1. Is this housing allocation Pareto efficient? School A receives $800,000. Yes, the current allocation is Pareto efficient. Family A lives in the luxury home and Family B School B receives $500,000. lives in the modest home, and both families 1. Is this redistribution Pareto efficient? are satisfied. There is no way to reallocate the houses without making at least one family The redistribution is not Pareto efficient worse off. For example, if Family A were to because School A is worse off by losing move into the smaller home, they would be $200,000 in funding, while School B benefits worse off, even though Family B would be by gaining $200,000. Pareto efficiency is better off. This satisfies the definition of Pareto concerned with not harming anyone, and in efficiency, where no one can be made better this case, School A is harmed by the off without making someone else worse off. redistribution. 2. Does this allocation achieve equity? 2. How does this affect equity? Discuss how this impacts the fairness of educational While the allocation is Pareto efficient, it does opportunities for students in both schools. not achieve equity. Family A, which has a higher income, lives in the large, luxury home, This redistribution improves equity by while Family B, with lower income, lives in the providing more resources to School B, which small, modest home. From an equity serves a low-income community. By narrowing R.M.B standpoint, this may not seem fair, as it 2. Does this situation achieve equity? reflects existing income inequality. An The current allocation of funding does not equitable allocation might focus on a more achieve equity. School A receives more even distribution of housing resources, resources due to its higher performance, while regardless of the families' incomes. However, School B, with more struggling students, equity and efficiency often conflict, as is the receives less funding. From an equity case here. perspective, this can be seen as unfair because EXAMPLE 5 School B, which might need more support to help its students improve, is receiving fewer Imagine a town with two schools: School A resources. Equity would require a more and School B. The town allocates public balanced distribution of funding to ensure that funding for education based on academic students in both schools have equal performance: opportunities to succeed, regardless of their School A has high-performing students and initial performance. receives more funding.  If the town government redistributes School B has lower-performing students and some funding from School A to School receives less funding. B: This new allocation would not be Pareto efficient because School A, The rationale behind the funding allocation is which benefits from the current that investing more in high-performing funding, would have fewer resources, students (School A) will lead to greater future potentially harming its high- economic returns, while investing in lower- performing students. Although School performing students (School B) may not yield B would benefit from the increased as much improvement. Both schools are funding and might improve its currently operating without complaints from performance, School A’s loss of the administration, and no reallocations of funding would make its students funds are being proposed. worse off. Thus, the new allocation 1. Is the current funding allocation Pareto would not satisfy Pareto efficiency efficient? because one group (School A) is made worse off to improve the situation of Yes, the current funding allocation is Pareto another group (School B). efficient. School A, which has high-performing  The redistribution of funding would students, receives more funding and is improve equity by providing more satisfied with the current situation. School B, resources to underperforming although receiving less funding, operates students in School B, giving them a within the existing arrangement. To reallocate better chance to catch up funds from School A to School B would make academically. This approach aligns School A worse off by reducing their resources, with the principle of fairness, where even though it may benefit School B. Since any resources are distributed according to reallocation would make at least one school need rather than existing worse off, the current funding allocation is performance levels. However, Pareto efficient. R.M.B  achieving this equity would involve 3. Suppose the city reallocates buses from sacrificing Pareto efficiency. Area A to Area B to better serve the lower- income population. Would this new EXAMPLE 6 allocation be Pareto efficient? Why or why Consider a city with two areas, Area A (high- not? How would it impact equity? income neighborhood) and Area B (a lower- If the city reallocates buses from Area A to income neighborhood). The city runs a public Area B: bus service, but the buses run more frequently in Area A because more residents This new allocation would not be Pareto can afford tickets and there is higher demand. efficient because it would reduce the In Area B, buses run less frequently, even convenience for residents of Area A, who rely though many residents rely on public on the frequent bus service. Even though the transportation to commute to work policy would improve transportation in Area B, the harm to Area A residents means the 1. Is the current bus service allocation Pareto allocation would not be Pareto efficient. efficient? Explain why or why not. Impact on equity: The reallocation would Yes, the current allocation is Pareto efficient. improve equity by providing more The more frequent bus service in Area A meets transportation resources to the lower-income the higher demand from residents who can residents in Area B, ensuring fairer access to afford to use the bus, while Area B, despite public services. However, this would come at needing the service more, has less frequent the cost of reducing the quality of service in buses. To move buses from Area A to Area B Area A. would inconvenience the residents of Area A without necessarily fully addressing the MARKET FAILURE transportation needs of Area B. Since a  Market failure occurs when the free reallocation would harm one group (Area A), market, guided by supply and the current allocation is Pareto efficient. demand, fails to allocate resources 2. Does this allocation achieve equity? Discuss efficiently, leading to outcomes that whether the distribution of bus services do not maximize social welfare. between Area A and Area B is fair.  In public economics, which studies government policies and their impact The current allocation does not achieve on the economy, market failure is a equity. Residents of Area B, who may depend central concept justifying government more on public transportation due to lower intervention. incomes, have less access to bus services than the wealthier residents of Area A. From an FAILURE OF COMPETITION equity standpoint, this is unfair because those IMPERFECT COMPETITION who need public transport the most are getting the least service. Equity would require  Refers to any deviation from the a redistribution of buses to ensure that both conditions of perfect competition, areas have equal access to transportation, which is characterized by many small regardless of income levels. firms, homogenous products, and free market entry and exit. When R.M.B  these conditions do not hold, firms Environmental protection: Market forces may gain market power and can not adequately protect the environment manipulate prices, output, and other because private firms may not capture the full market factors, resulting in value of maintaining biodiversity or preserving inefficiency and welfare losses. ecosystems. TYPES OF IMPERFECT COMPETITION IMPERFECT INFORMATION Monopoly: A single firm dominates the  Imperfect information refers to a market and restricts output to maximize situation in which all parties involved profits, resulting in higher prices and reduced in a transaction, decision, or consumer welfare. interaction do not have access to the same level of information. This lack of Oligopoly: A few large firms control the complete or accurate information can market, often leading to price-setting lead to suboptimal decisions, behavior, collusion, and reduced competitive inefficiencies, and market failures. pressure. Key Characteristics: Monopolistic Competition: Many firms sell similar but differentiated products. While this Asymmetry of Information: One party may increases consumer choice, it can lead to have more or better information than another, inefficiencies because firms spend more on leading to an imbalance in knowledge that can marketing and product differentiation than affect outcomes. necessary. Incomplete Information: Not all relevant Monopsony details are known to all parties, which can hinder informed decision-making. INCOMPLETE MARKETS Uncertainty: The lack of information can lead  Incomplete markets occur when to uncertainty about the results of decisions, markets fail to provide goods and increasing risks for all involved parties. services even though people are willing to pay for them. This often Agricultural Markets happens in cases where private firms  Price Information: Farmers often lack cannot capture all of the benefits or access to real-time price information profits from providing a good, leading for their produce. This can lead to to an underproduction or lack of them selling crops at lower prices supply. than they could receive if they were EXAMPLES: informed about prices in other markets. Insurance markets: Private insurance firms may refuse to provide coverage to high-risk Weather Forecasts individuals (e.g., pre-existing health conditions) because the costs of insuring them  Many farmers do not receive timely are too high, even if those individuals are and accurate weather information, willing to pay for insurance. impacting their planting and harvesting decisions. R.M.B Labor Market Consequently, private firms have no incentive to produce these goods,  Job Opportunities: Job seekers may leading to under-provision or even not have access to information about complete market absence of essential job openings, company reputations, services. or wage levels, resulting in mismatches between job seekers and EXTERNALITIES available positions.  An externality occurs when a  Skill Requirements: Workers may be transaction affects a third party who is unaware of the skills that are in not directly involved in the demand in the labor market, leading transaction, and these effects are not to overqualification or reflected in the market price. underqualification for available jobs. Externalities can be either positive or Public Services negative.  Government Programs: Citizens may not be aware of government TYPES OF EXTERNALITIES assistance programs, social services, or community resources available to Negative Externalities: Imposes a cost on them, limiting their access to support. third parties (e.g., pollution from a factory  Voting Information: Voters may not affecting nearby residents). have sufficient information about  Automobile exhaust candidates or policy issues, leading to  Air Pollution from Factories uninformed voting decisions.  Barking dogs (loud pets) PUBLIC GOODS  Loud stereos in apartment building  Traffic Congestion  Public goods are defined by their non- excludability and non-rivalrous  Cigarette Smoking consumption. Non-excludability  Deforestation means that it is impossible or highly Positive Externalities: Provides a benefit to costly to prevent individuals from third parties (e.g., education leading to a more consuming the good, while non- informed society). rivalry means that one person’s consumption does not reduce the  Immunizations availability of the good to others.  Education  Restored historic buildings Examples: National defense, public  Research into new technologies parks, Street lighting. DEALING W/ NEGATIVE EXTERNALITIES WHY MARKET FAILS IN PUBLIC GOODS? Should we completely ban an activity that has  The free-rider problem arises negative externalities? because individuals can benefit from  Should we ban all cars? public goods without paying for them. R.M.B   Should we ban all smoking in all public Negative externalities: Dogs can be spaces? dangerous if aggressive, and their barking can  Should we muzzle all dogs? disturb the peace in neighborhoods.  Should we ban karaoke in apartment Why a complete ban on unmuzzled dogs is buildings? unnecessary: Most dogs are not aggressive, Should we ban all cars? and properly trained dogs pose little risk. Muzzling all dogs could be seen as an Negative externalities: Cars contribute to overreach and cruel in cases where dogs are pollution (both air and noise), traffic harmless. congestion, and accidents, which have significant social costs. Better alternatives: Enforcing regulations on certain breeds, promoting dog training Why a complete ban might be too extreme: programs, and requiring muzzles for While the externalities are serious, cars are aggressive or poorly trained dogs. Noise essential for transportation, economic complaints can be managed with fines or local activity, and personal mobility, especially in ordinances rather than muzzling all dogs. areas with poor public transport. Should we ban karaoke in apartment Better alternatives: Instead of a full ban, we buildings? can reduce externalities by promoting electric vehicles, improving public transport, creating Negative externalities: Karaoke in shared car-free zones in high-density areas, and spaces like apartments can create significant encouraging carpooling or biking. noise pollution, disturbing neighbors and potentially affecting mental well-being. Should we ban all smoking in all public spaces? Why a complete ban might be excessive: Some people may enjoy karaoke as a social Negative externalities: Secondhand smoke is activity or a hobby, and a full ban might harmful to non-smokers, pollutes the air, and infringe on personal freedom. increases public healthcare costs. Better alternatives: Implementing noise Why a ban in all public spaces might make curfews, setting up soundproofed karaoke sense: Smoking directly harms others in close rooms, or allowing karaoke at reasonable proximity, and the justification for banning hours might balance the interests of both smoking in public spaces (like restaurants, karaoke lovers and their neighbors. parks, etc.) is strong. However, some might argue for designated smoking areas to balance Should we ban alcohol consumption? the rights of smokers and non-smokers. Negative externalities: Alcohol consumption Alternative approaches: Designating specific can lead to drunk driving, domestic violence, smoking zones and further regulating smoking public disorder, and significant public health areas to protect public health without costs. These harms affect not just the infringing on individual choice. individual drinker but also others around them and society as a whole. Should we muzzle all dogs? R.M.B Why a complete ban might be too extreme: DEALING W/ POSITIVE EXTERNALITIES Prohibition of alcohol, as seen historically, Should we take all activities that have positive often leads to unintended consequences like externalities to the max? the rise of black markets, criminal activity, and the erosion of personal freedoms. Banning  Should we force everyone to take flu alcohol outright ignores the fact that many shots? people consume alcohol responsibly without  Should we require everybody to get a causing harm to others. PhD?  Should we restore all historic Better alternatives: Instead of a ban, buildings? regulating alcohol sales (e.g., age restrictions,  Should we pay for every research limiting sales hours) and enforcing strict laws project scientist that we do? against drunk driving or public intoxication can mitigate the externalities. Public health Should we force everyone to take flu shots? campaigns on responsible drinking and support for addiction recovery can further Positive externalities: Flu shots reduce the address the issues without infringing on spread of influenza, lower healthcare costs, individual rights. and protect vulnerable populations through herd immunity. Should we ban fast food? Why mandatory flu shots might be excessive: Negative externalities: Fast food While flu vaccines have clear benefits, forcing consumption is linked to obesity, heart everyone to take them disregards personal disease, and diabetes, all of which result in autonomy, medical exemptions, and varying higher public healthcare costs. These health levels of risk. Not everyone may need a flu problems also lower overall productivity and shot (e.g., those who are allergic or have other can strain social welfare systems. health conditions), and a mandate could spark resistance or erode trust in public health Why a complete ban might be excessive: initiatives. While fast food can contribute to poor health, banning it entirely would infringe on personal Better alternatives: Strong public health choice and could disproportionately affect campaigns, providing free access to vaccines, lower-income individuals who rely on fast and encouraging voluntary vaccination food for affordable meals. It could also harm through incentives would achieve high businesses and jobs in the fast-food industry. coverage without coercion. Better alternatives: Instead of a ban, Should we restore all historic buildings? regulating the fast-food industry by requiring clearer nutritional labeling, reducing harmful Positive externalities: Restoring historic ingredients (like trans fats), and promoting buildings preserves cultural heritage, healthier options would help address the enhances tourism, and maintains community negative externalities without eliminating identity, all of which benefit society. personal freedom. Public health campaigns Why restoring all historic buildings might be encouraging healthy eating could also reduce excessive: While preserving history is fast food consumption over time. valuable, some buildings may be beyond R.M.B repair or have limited cultural significance. solves critical societal problems, benefiting Restoration can be extremely costly and may everyone. divert resources from other pressing needs Why funding every research project is like affordable housing or infrastructure inefficient: Not all research projects are development. equally valuable, feasible, or relevant to Better alternatives: Prioritizing the current societal needs. Funding every restoration of historically or architecturally proposal would lead to waste, as some significant buildings, while allowing less projects may lack scientific merit, fail to critical structures to be modernized or address pressing issues, or duplicate existing repurposed, would balance heritage work. preservation with practicality. Funding could Better alternatives: Funding should be be focused on buildings with the greatest allocated based on merit, potential impact, cultural or educational value. and societal need. Competitive grants, peer Should we require everybody to get a PhD? review, and strategic investment in high- potential fields can maximize the benefits of Positive externalities: Higher education can research without overfunding low-impact increase productivity, innovation, and societal projects. knowledge, which benefits the broader economy and culture. Should we force everyone to exercise daily? Why requiring everyone to get a PhD is Positive externalities: Regular exercise impractical: Not everyone needs or desires improves public health by reducing the the level of specialization that a PhD requires. incidence of chronic diseases like obesity, Forcing it on everyone would result in wasted heart disease, and diabetes. It can also lower resources and time. Additionally, not all jobs healthcare costs and increase productivity. or sectors benefit from such advanced Why forcing everyone to exercise is degrees, and society needs a diversity of skills impractical: Exercise regimens need to be and educational levels, from trades to tailored to individuals’ physical conditions, professional certifications. and not everyone has the same capacity or Better alternatives: Ensuring access to quality time. Forcing daily exercise could result in education at all levels and promoting lifelong injury or resentment, particularly for people learning would better match people's with disabilities, illnesses, or demanding work interests and societal needs. Encouraging schedules. education in high-impact areas (like STEM) or Better alternatives: Encouraging exercise providing scholarships can increase positive through public health campaigns, providing externalities without blanket mandates. access to parks and fitness facilities, and Should we pay for every research project incorporating physical education into schools scientists propose? and workplaces would promote better health without compulsion. Positive externalities: Scientific research drives innovation, improves public health, and Should we require everyone to donate to charity? R.M.B Positive externalities: Donations to charity solely focusing on renewables, could also be a help alleviate poverty, provide education, and more balanced approach. improve public services, benefiting society at CORRECTING NEGATIVE EXTERNALITIES large.  Pigovian Taxes: Imposing a tax equal Why mandatory charity is problematic: to the external cost associated with Requiring donations from everyone, the negative externality (e.g., carbon regardless of personal financial situation, can tax on emissions). lead to hardship for those struggling to make  Regulation and Standards: ends meet. Moreover, forced charity removes Governments can impose regulations, the voluntary nature of giving, which can such as emissions standards or caps reduce the moral and emotional satisfaction on pollutants. people derive from helping others.  Tradable Permits: Create a market for Better alternatives: Encouraging charitable pollution permits that firms must buy giving through tax incentives, promoting to emit a certain amount of pollution corporate social responsibility, and raising (e.g., cap-and-trade systems). awareness about the impact of donations can CORRECTING POSITIVE EXTERNALITIES increase contributions without imposing financial burdens on individuals.  Subsidies: Governments can provide financial support for activities that Should we subsidize renewable energy for all create positive outcomes. households?  Public Provision of Goods: The Positive externalities: Renewable energy government can directly provide reduces carbon emissions, improves air goods or services that yield positive quality, and mitigates climate change, which externalities, such as public benefits society and future generations. education, parks, or infrastructure. This ensures universal access to these Why subsidizing renewable energy for all goods, enhancing overall societal households is inefficient: While renewable welfare. energy is important, subsidizing it for every  Grants and Funding for Research: household can strain government resources. Provide funding for research and Not all areas have the same access to development in areas that produce renewable resources (e.g., solar in cloudy positive externalities (e.g., renewable regions), and other infrastructure energy technologies). improvements may take precedence. Blanket subsidies may also disproportionately benefit EXAMPLE 1 wealthy homeowners over low-income A major city has implemented a congestion individuals who rent. pricing policy to reduce traffic in the Better alternatives: Offering targeted downtown area during peak hours. Drivers are subsidies based on region, income, and now charged a fee to enter certain high-traffic energy needs would ensure that resources are zones during these times. The goal is to reduce allocated where they have the most impact. traffic congestion, improve air quality, and Incentivizing energy efficiency, rather than encourage the use of public transportation. R.M.B However, the policy has resulted in a series of areas that were previously unaffected, making unintended and complex externalities the problem more geographically complex. affecting different sectors of society. 4. Retailers and restaurants located inside the 1. Traffic within the designated congestion congestion zone report a drop in foot traffic, zone decreases, improving travel times for as fewer people are willing to pay the fee to those who can afford the fee and reducing visit the area. This decline negatively affects vehicle emissions in the city center. their revenues. Positive externality - The intended reduction Negative externality - The decline in foot in traffic in the city center represents a positive traffic for small businesses in the congestion externality. It improves travel times, lowers zone is an unintended negative externality. stress for drivers, and reduces carbon These businesses, which often rely on casual emissions. However, this benefit is only visitors or commuters, face reduced revenues. realized by those who can afford the The policy inadvertently harms local congestion fee, meaning the externality is not economies, creating pressure on the city to equally distributed. find ways to balance economic vitality with environmental goals. 2. The shift from cars to public transportation has led to overcrowded buses and trains, 5. Reduced air pollution in the city center has particularly during rush hours, resulting in led to improved air quality, which benefits longer waits and discomfort for commuters. public health by decreasing respiratory problems and lowering healthcare costs for Negative externality - The shift in travel the population living and working in the area. behavior leads to a significant increase in public transportation use, overwhelming the Positive externality - The reduction in system. This negative externality impacts pollution within the congestion zone improves commuters who rely on public transport, air quality, leading to better public health especially those who cannot afford outcomes. This positive externality benefits alternatives like taxis or ride-sharing services. everyone in the zone, including vulnerable The increase in discomfort and travel delays populations such as children and the elderly. counteracts the potential environmental However, this benefit may be offset by the benefits of reduced car use. increase in pollution in suburban areas where traffic has shifted. 3. Areas just outside the congestion zone now experience increased traffic, as drivers reroute 6. Wealthier individuals are more likely to to avoid paying the fee, causing congestion continue driving and paying the fee, while and pollution in these previously quieter lower-income individuals are priced out of the areas. congestion zone. This reinforces economic disparities, as only affluent individuals can Negative externality - Traffic is simply afford the convenience of driving into the city displaced rather than eliminated. Suburban center during peak times. areas around the congestion zone experience higher traffic volumes, leading to increased Negative externality -The congestion fee congestion and pollution. This negative disproportionately impacts lower-income externality shifts the burden of the policy to individuals who cannot afford to pay the fee R.M.B and thus have limited access to certain parts concerns about long-term skill erosion and job of the city during peak hours. Wealthier displacement. residents, who can absorb the cost, continue Negative externality - The automation of to benefit from driving while the policy diagnostic tasks threatens the traditional reinforces social inequality. This negative training and development paths for junior externality raises concerns about the fairness doctors and nurses. This negative externality of the policy, especially if alternatives like could lead to a long-term erosion of diagnostic affordable public transport improvements are skills, making the healthcare workforce overly not implemented alongside it. reliant on AI. Furthermore, it may lead to job EXAMPLE 2 losses or reduced opportunities for healthcare professionals, particularly those in entry-level A government-backed initiative has roles. introduced an artificial intelligence (AI) system to help diagnose diseases in public hospitals. 3. The use of AI has reduced waiting times for The AI uses vast amounts of medical data to patients, especially in underfunded hospitals, identify patterns and recommend treatments, as the system speeds up the diagnostic reducing the workload for doctors and process. This has particularly benefited low- speeding up patient diagnoses. While the income patients who rely on public hospitals system is designed to improve efficiency and and typically face long wait times. accuracy in healthcare, it has generated a Positive externality - The AI system makes series of significant externalities—some healthcare more accessible, particularly in anticipated, some not. overburdened public hospitals. This positive 1. The AI system increases diagnostic accuracy externality reduces wait times and ensures in many cases, reducing human errors and more patients receive timely care. However, leading to better patient outcomes. This has this benefit may be unevenly distributed if long-term positive impacts on public health wealthier patients can still access human and reduces costs associated with doctors, creating an implicit two-tier system. misdiagnoses. 4. Patients are worried about their personal Positive externality - The AI system improves medical data being used to train the AI diagnostic accuracy, which leads to better without their explicit consent. Some are patient outcomes and reduces the likelihood of concerned about potential data breaches or costly and harmful medical errors. This misuse of sensitive health information by third positive externality benefits the entire parties. healthcare system, improving efficiency and Negative externality - The use of personal freeing up resources for other areas of patient medical data without explicit consent care. introduces a negative externality in the form 2. As AI takes over many diagnostic tasks, of privacy risks. Patients' concerns about data junior doctors and nurses are finding security and the misuse of their information themselves with fewer opportunities to must be addressed to maintain trust in the develop hands-on diagnostic skills, raising healthcare system. R.M.B 5. The AI system reduces overall healthcare costs by cutting down on the number of unnecessary tests and streamlining diagnosis. These savings can be reallocated to other parts of the healthcare system, benefiting patients and healthcare providers alike. Positive externality - The cost savings generated by the AI system benefit both the government and patients by making healthcare more affordable. These savings can be reinvested in other critical healthcare areas, improving the overall quality of the system. However, the distribution of these savings must be carefully managed to ensure they benefit all patients, not just certain segments. 6. Wealthier patients in private hospitals have access to human doctors for diagnosis, while lower-income patients in public hospitals increasingly rely on AI systems. This creates a perception that AI-based care is of lower quality, leading to concerns about unequal access to high-quality healthcare between socioeconomic classes. Negative externality - The perception that AI- based care is inferior to human diagnosis could lead to unequal treatment for patients based on their income level. This negative externality raises ethical concerns about whether patients in public hospitals are receiving the same quality of care as those in private hospitals, further entrenching socioeconomic disparities. R.M.B