Spillover Principle and Public Goods Allocation

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Table of Contents

Positive and Normative Statements
The Production Possibility Curve
The Spillover Principle
Public Goods
Conclusion
References

The purpose of this paper is to present a short introduction to economics. To do so, it is necessary to address several topics. The explanation of the difference between a positive and normative statement is needed to be supported by examples of each type. Notably, the economy can achieve points that are outside the production possibility curve. It is important to review the Spillover Principle and give examples of goods with a positive externality and a negative externality. The allocation of public goods is another topic that needs close attention.

Positive and Normative Statements

There are two distinct approaches to solve economic issues and search for the best solutions. Positive statements explore the situation without evaluation. For example, how will an increase in the price of petroleum affect the number of car drivers? Normative statements judge the proposed solution. For instance, should the local authorities reduce registration fees on electric cars?

The Production Possibility Curve

According to the production possibility graph, economists can define the potential of the economy, what items can be made and marketed. The graph usually contains x and y axes for production options and a possibility curve that allows evaluating the efficiency of the resource employment. At any point on the graph enclosed by the curve, the resources are not used to the full extent. At any point on the curve, the resources are rationally allocated and serve their purpose. Any point outside of the area enclosed by the curve is a position that allows producing more items but with more resources of better quality. To reach this point the production possibility curve needs to shift outward. This becomes possible when new technologies or better financial support provide opportunities for product development. New qualified employees can also help to reach a desirable point.

The Spillover Principle

The costs and benefits arising from producing and consuming particular goods can affect not only the manufacturers, suppliers, and buyers of these products but also random members of society. Economists use the term spillovers or externalities to indicate costs and benefits that influence the people external to the production and use of a product. The spillover benefits experienced by the society are called positive externalities, while the spillover costs that random people have to pay for the production and consumption of the particular item are named negative externalities.

The production and use of electric cars present an array of spillover costs and benefits. Vehicle assembly plants pollute the environment what is a negative externality, but electric cars do not emit exhaust fumes reducing air pollution. Gas stations suffer from the occurrence of alternative power supplies while people in the neighborhood enjoy the absence of noise from internal combustion engines. The goods with externalities should be allocated in a way that guarantees a profound use of their spillover benefits for society. The use of electric vehicles with zero carbon dioxide emissions in national parks is a good example of product allocation.

Public Goods

Economists define public goods as products or services that are available at no cost to all citizens. The government or entrepreneurs can allocate public goods. This type of goods has two distinct characteristics: non-excludability and non-rival consumption. Everyone can use public goods without an exemption. Even people who do not pay for goods can consume them. This situation provokes the “free-rider” problem. When someone enjoys a firework party all people in the neighborhood can watch the show at no cost because it is impossible to force all viewers to pay. Such situations can lead to the closing of many non-profitable organizations as they cannot survive without the support from people who use their services.

Non-rival consumption means that consumers cannot stop others from using a particular product or service. The government and organizations supply public goods with no marginal costs to extra people. If one person can use the product or service then everyone can do so as well. Pure public goods are limited in number. The cities provide street lighting, crime control, and flood defense systems at no cost to the citizens. People can enjoy free available knowledge in public libraries.

Ethnical diversity affects the allocation of public goods. According to Ortuño and Desmet (2016), “Ethnic groups’ demand for local public goods potentially reflects their budget constraints, which depend on various factors: income, cost of providing public services, degree of congestion, geographic differences in policy delivery, environmental conditions, and levels of segregation in the city.”

Soomi Lee, Dongwon Lee, and Thomas E. Borcherding (2016) consider public goods to be a market failure. Individual entrepreneurs cannot provide this type of good for a long period without profit because they risk becoming bankrupt. The government should have a role in allocating public goods to control the fair use of products and services by all members of society. The privatization of public goods can lead to improper allocation (Ortuño, Gomes, & Desmet, 2016). Organizations might use public goods to advertise and sell their services and limit access to products and services to people who refuse to pay for extra options. Nevertheless, the allocation of public goods by the government has its limitations. According to Ortuño and Desmet (2016), “local governments respond to an increase in ethnic heterogeneity by reducing spending on price-elastic public goods. This is because increased heterogeneity in preferences increases the political cost of providing the goods”.

Conclusion

The purpose of this paper was to provide a short introduction to economics. The notions of positive and normative statements were described along with the difference between them. The proper examples of each statement were given to illustrate the descriptions. The main characteristics of the production possibility curve were presented to explain how an economy can achieve points that are located outside of the curve. The Spillover Principle was reviewed. After the introduction to the notions of spillover benefits and costs, particular examples of positive and negative externalities were given. The examples of spillover benefits and costs proved useful in a description of ways to allocate goods with externalities. The research on public goods was done to identify the main characteristics of this type of good. The “Free-rider” problem was proved to be the biggest problem of public goods. Public goods could not be provided by individual entrepreneurs permanently because they did not make a profit. It was concluded that the government should have a role in the allocation of public goods to ascertain fair use of products and services by all members of society. The privatization of public goods could lead to the improper allocation and maltreatment of certain citizens in terms of their right to use public goods.

References

Lee, S., Lee, D., & Borcherding, T. E. (2016). Ethnic Diversity and Public Goods Provision: Evidence from US Municipalities and School Districts. Urban Affairs Review, 52(5), 685-713.

Ortuño, I., Gomes, J., & Desmet, K. (2016). The geography of linguistic diversity and the provision of public goods (No. 23940). Madrid, Spain: Universidad Carlos III de Madrid. Departamento de Economía.

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Spillover Principle and Public Goods Allocation

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