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Showing posts with the label public goods

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Why Government Has to Provide Public Goods? No Private Army or Police or Justice System!

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  Economics literature recognizes the differential nature of goods. Each good is unique in itself. It must be pointed out that in economics, good is something than enhances economic welfare while bad is something that reduces economic welfare. For practical reasons, one can assume economic welfare to be equivalent to social welfare. Secondly, contrary to public perception about distinctions between goods and services, economics literature clusters both of them into goods (the singular of which is good). The past post “ Examining the Nature of Good ” went to certain depth in examining the nature and classification of goods. The current post would seek to build up on the same and strive to understand why certain goods are provided in the market whereas certain goods are offered only by the government. In theory, nothing prevents the private sector from offering every good, or in other words converting each good into either private or club good. Similarly, nothing prevents the government
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Examining the Nature of Goods

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Economics literature catalogues goods around two parameters, exclusion and rivalry. Rivalry implies whether the good could be shared by more than one agent without having to produce it more. Inferred is the cost of production of the good to the marginal agent is zero. Excludability is all about the ability or lack of it in preventing another agent from consuming the good. Certain goods like air are inherent in being unexcludable.   In fact, air given its abundance, is non rivalrous, in contrast to let us say, a fruit which if had to be shared, has to be produced more. In other words, in case of rivalrous goods marginal production is positive, for non rivalrous goods, marginal production is practically zero.   The above bounds lead to construction of four types of goods. Those goods inherently excludable and non rivalrous like air etc. are called public goods.   Public roads too have similar characteristics and so do national security, defence etc.   However the inherent of non
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