Authors libby rittenberg 825
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In the approach to the analysis of public sector choices known as public
interest theory, decision making is a technical matter. The task of
government officials is to locate the efficient solution and find a way to
move the economy to that point.
For a public good, the efficient solution occurs where the demand curve
that reflects social benefits intersects the supply curve for producing the
good; that is, the solution at quantity Qe and price P1 given in Panel (a)
of Figure 15.3 "Correcting Market Failure" Because this demand curve for a
public good is not revealed in the market, the task for government officials
is to find a way to estimate these curves and then to arrange for the
production of the optimum quantity. For this purpose, economists have
developed an approach called cost-benefit analysis, which seeks to
quantify the costs and benefits of an activity. Public officials can use costbenefit analysis to try to locate the efficient solution. In general, the
efficient solution occurs where the net benefit of the activity is maximized.
Public sector intervention to correct market failure presumes that market
prices do not reflect the benefits and costs of a particular activity. If those
prices are generated by a market that we can regard as perfectly
competitive, then the failure of prices to convey information about costs or
benefits suggests that there is a free-rider problem on the demand side or
an external cost problem on the supply side. In either case, it is necessary
to estimate costs or benefits that are not revealed in the marketplace.
The public interest perspective suggests an approach in which policy
makers identify instances of potential market failure and then look for
ways to correct them. Public choice theory instead looks at what motivates
the people making those policy choices.
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
825
