A TEACHER GUIDE TO THE CALIFORNIA ECONOMICS STANDARDS

Transcription

1 A TEACHER GUIDE TO THE CALIFORNIA ECONOMICS STANDARDS Author: R. J. Charkins, Ph.D. Professor of Economics, California State University, San Bernardino and Executive Director, California Council on Economic Education Writing Team: Joanne Benjamin President, California Association of School Economics Teachers Tom Means Professor of Economics and Director of the Center for Economic Education, San Jose State University Karl Ochi Economics Teacher, George Washington High School and winner of the 2003 National Association of Security Dealers National Teaching Award Editors: Shala London Assistant Director, Center for Economic Education, University of Kansas Barbara Phipps Director, Center for Economic Education, University of Kansas Carol Smith Educational Consultant Design: E Factor Media, Inc. San Diego, California The California Council on Economic Education expresses our appreciation to Moody s KMV for their support of the development of this Guide.

2 Table of Contents A Teacher Guide to the California Economics Standards INTRODUCTION 23 UNITS Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6 Unit 7 Unit 8 Unit 9 Unit 10 Unit 11 Unit 12 Unit 13 Unit 14 Unit 15 Unit 16 Unit 17 Unit 18 Unit 19 Unit 20 Unit 21 Unit 22 Unit 23 Choice Cost Benefit Cost Analysis Marginal Analysis Exchange Specialization in Production The Market System Buyers and Sellers Market Analysis More Markets Human Capital Incentives Property Rights Messed Up Markets Government and Public Choice Introduction to Macroeconomics Reading the Economy Fiscal Policy Money and the Federal Reserve System Monetary Policy Personal finance Globalization An End and a Beginning

3 Teacher s Guide to California High School Economics Standards Dear Teacher, As you are aware, the California Board of Education approved the History/Social Science Standards in The good news is that those Standards include a strong economics strand in the K-11 Standards and a new 12th grade course. The high school economics course outlined in the 1998 History/Social Science Standards is different than a typical micromacroeconomics course. This guide is meant to help you recognize those differences and to suggest ways that might help you teach the course. It may be helpful, at the outset, to suggest the goals of a high school economics course. The goals of the new course are to empower students with: the skill of economic reasoning that they can apply to any decisions they make, an understanding of the economic system in which they participate so that they can participate more effectively in that system, and an understanding of the macroeconomy so that they will understand the news that they see and hear. To facilitate your understanding of the Standards, it may be helpful to identify the differences between the course that is outlined in the Standards and the typical micro/macro course. How are the 1998 Standards New? The Standards are aimed at students who may or may not go on to college. The goal of the course is not to give students a heads up on the college course, but to prepare them for life. This is not a dumbing down of the course, rather it is an attempt to provide students with economic reasoning skills that they will use for the rest of their lives. In addition, the course is meant to give them an idea of the power that they have in the economy and the consequences of their choices. The Standards de-emphasize the technical tools of economic analysis such as graphs and equations. While it is fine to use graphs in teaching the course, students can have a firm conceptual understanding of economics without an ability to manipulate the graphs. Research in economic education tells us that the graphs increase understanding for a small portion of our students and confuse many others. In this case, the statement may be true that students understand economics until we teach it to them. The emphasis in Standards is on conceptual understanding which is sometimes more difficult than graphical manipulation. In this Guide, our approach has been to begin by presenting the tools of economic reasoning. The first six units help you teach the reasoning skills. Unit One discusses scarcity, the basic economic problem, Unit Two presents choice and opportunity cost. Three is benefit/cost analysis, Four is marginalism, Five is exchange and Six is specialization in production according to comparative advantage. Once students master these reasoning tools, they are ready to think like an economist.

4 The next section presents the market system as an efficient method of providing incentives to production and facilitating exchange. The labor market is discussed as similar to other products, emphasizing the fact that students must develop a marketable bundle of human capital in order to survive in the 21st century global economy. Market imperfections are introduced to illustrate the fact that the perfect efficiency of markets is seldom reached. Government attempts to correct market imperfections are presented along with government imperfections. The goal of this section is to enable students to look at imperfect market outcomes and imperfect government outcomes and decide on an issue by issue basis which is the better of the two. The course should not present a conservative or a liberal bias, but enable students to make informed decisions based on their interpretation of each issue, armed with the tools of economic analysis. The macroeconomics section does not go into great detail on the fine points of Keynesian, Monetarist, and other schools of macroeconomic thought. It is meant to familiarize students with the macroeconomy that they will hear and read about in the news. Optional Unit 17 is meant to prepare students who participate in the California Council on Economic Education s Capital Market Contest. International is not a separate unit, but is blended into units 5, 6, 8, and 22. The emphasis of the Standards and this Guide is on the student. We have tried to boil this down to the essentials. (If you teach an AP class, you may find some of this useful but you will certainly not find it sufficient.) The California History/Social Science Standards for Grade 12 Principles of Economics emphasize the most powerful messages of economics that help students survive and prosper. Students who successfully complete this course may say that it is one of the most powerful courses they have taken in school and that they have a much better understanding of the world around them as a result of the course. This should be the case because students live and participate in this economy. The course is really about them. It is based on nine economic principles. 1. People choose. While we will get into a much more detailed discussion on this topic, people too often think in terms of needs, which relegates them to no options and, therefore, no choice. In fact, we will make the argument that a discussion of needs has no place in an economics course because people are always choosing. Helping students recognize their decisions is one of the most important tasks of an economics course. 2. Every choice has a cost. People often use the expression, There is no such thing as a free lunch, which flies in the face of the experience of many students who have been eating what they consider free lunches for their entire school career. In this guide, we will state it slightly differently, There is no such choice as a free choice. Every time a decision is made, one alter native is selected and one is not. The one that is not selected is what the decision maker gave up. That is the cost of the choice. 3. Benefit/cost analysis is useful. As they progress through the school years, students make many decisions and the consequences of those decisions become more and more important as they grow. By the time they reach high school, they are making life-shaping decisions. It is important that they know how to use benefit cost analysis to help clarify the issues. Since benefit cost analysis can be helpful in so many areas, it is included in the Standards from grades K through 12.

5 4. Incentives matter. Students are constantly exposed to incentives. Grades are meant to act as an incentive to students. Often the grades themselves are insufficient so parents supplement these incentives with financial ones. Many of your students have a part-time or a full-time job. They work for financial incentive. Many of your students play a sport. They play for many reasons including self-satisfaction, fame, glory, and perhaps an opportunity to play in college. These are all incentives. So the concept is not new to them; you have an opportunity to show them how incentives apply in markets. 5. Exchange benefits the traders. Many of your students throw the term ripoff around very casually. They often view market transactions as win/lose situations. You have the opportunity to show them that people don t voluntarily exchange unless they expect to gain more than they give up. This is a new and often enlightening insight for some. 6. Markets work with competition, information, incentives and property rights. Your students are all consumers so they are familiar with the product market. You have the opportunity to help them identify the motivating forces behind particular markets and the constraints faced by participants on both sides of those markets. You can point out the importance of competition and the results if competition or other important market components are missing. You can address the concept of missing market components to help them analyze strong social concerns such as poverty, pollution, endangered species, and others. 7. Skills and knowledge influence income. As mentioned, many of your students are working at part-time or full-time jobs and most hope to get a good job when they leave school, regardless of whether they plan to leave school at the end of 12th grade or after college. The problem is that many fail to recognize the connection between school, skills and knowledge (human capital), and income. This course can dramatize that connection for them. 8. Monetary and fiscal policies affect peoples choices. While macroeconomics is a mystery to many people, the fundamentals taught in the high school economics course are pretty straightforward. Understanding basic economic indicators such as changes in Gross Domestic Product, the unemployment rate or the Consumer Price Index and the impact that those changes have on them will help students understand the state of the economy and their position in the economy. How monetary and fiscal policies attempt to influence these variables and the affect that those policies have on your students can be a revelation for them. 9. Government policies have benefits and costs. In a recent national survey, over 60% of high school students thought that government would determine their income. They had little idea of the ways in which governments (local, state, and national) influence them. Besides monetary and fiscal policy, governments affect our students lives through income redistribution policies, regulation of prices, trade policies, and government regulations. Much like a study of monetary and fiscal policy, government action in the economy and the effects of those actions are surprising to many students. Teaching and learning economics can be very exciting. Our hope is that you and your students have a terrific educational experience. Jim Charkins, Executive Director California Council on Economic Education

6 GRADE 12 STANDARDS THE STANDARDS 12.1 Students understand common economic terms and concepts and economic reasoning: Section 1. the causal relationship between scarcity and choice Section 2. opportunity cost and marginal benefit and marginal cost Section 3. the difference between monetary and non-monetary incentives and how changes in incentives cause changes in behavior Section 4. the role of private property as an incentive in conserving and improving scarce resources, including renewable and non-renewable natural resources Section 5. the role of a market economy in establishing and preserving political and personal liberty (e.g., the work of Adam Smith) 12.2 Students analyze the elements of America s market economy in a global setting: Section 1. the relationship of the concept of incentives to the law of supply and the relationship of the concept of incentives and substitutes to the law of demand Section 2. the effect of changes in supply and/or demand on the relative scarcity, price and quantity of particular products Section 3. the role of property rights, competition, and profit in a market economy Section 4. how prices reflect the relative scarcity of goods and services and perform the allocative function in a market economy Section 5. the process by which competition among buyers and sellers determines a market clearing price Section 6. the effect of price controls on buyers and sellers Section 7. the role of domestic and international competition in a market economy in terms of goods and services produced, and the quality, quantity, and price of those products Section 8. the role of profit as the incentive to the entrepreneurs in a market economy Section 9. the functions of the financial markets Section 10. the economic principles that guide the location of agricultural production and industry and the spatial distribution of transportation and retailing facilities Section 12.3 Students analyze the influence of the federal government on the American economy: Section 1. Section 2. Section 3. Section 4. how the role of government in a market economy often includes providing for national defense, addressing environmental concerns, defining and enforcing property rights, attempting to make markets more competitive, and protecting consumer rights the factors that may cause the costs of government actions to outweigh the benefits the aims of government fiscal policies (taxation, borrowing, and spending) and their influence on production, employment, and price levels the aims and tools of monetary policy and their influence on economic activity (e.g., the Federal Reserve)

7 12.4 Students analyze the elements of the United States labor market in a global setting: Section 1. the operations of the labor market, including the circumstances surrounding the establishment of principal American labor unions, procedures used to gain benefits for its members, the effect of unionization, the minimum wage, and unemployment insurance Section 2. the current economy and labor market including the types of goods and services produced, types of skills necessary, the effect of rapid technological change, and the impact of international competition Section 3. wage differences among jobs and professions using the laws of demand and supply and the concept of productivity Section 4. the effects of international mobility of capital and labor on the U.S. economy 12.5 Students analyze the aggregate economic behavior of the United States economy: Section 1. distinguishing between nominal and real data Section 2. defining, calculating and explaining the significance of an unemployment rate, the number of new jobs created monthly, an inflation or deflation rate, and a rate of economic growth Section 3. distinguishing between sort-term and long-term interest rates and explaining their relative significance 12.6 Students analyze issues of international trade, and explain how the U.S. economy affects, and is affected by, economic forces beyond its borders: Section 1. Section 2. Section 3. Section 4. the gains in consumption and production efficiency from trade with emphasis on the main products and changing geographic patterns of twentieth century trade among countries in the eastern hemisphere the reasons for and the effect of trade restrictions in the Great Depression compared with the present day arguments among labor, business, and political leaders over the effects of free trade on the economic and social interests of various groups of Americans the changing role of international political borders and territorial sovereignty in a global economy explain foreign exchange, how exchange rates are determined, and the effects of the dollar gaining (or losing) value relative to other currencies (a strong or weak dollar)

8 Unit 15 Government and Public Choice Theory Standards: PRINCIPLE 9: 2.3 Understand how the role of government in a market economy often includes providing for national defense, addressing environmental concerns, defining and enforcing property rights, attempting to make markets more competitive, and protecting consumer rights 12.2 Identify the factors that may cause the costs of government actions to outweigh the benefits. Government economic policies have both benefits and costs. Introduction In previous units, we have investigated the strengths and weaknesses of markets. We found that markets can be efficient in producing and exchanging goods and services. We also found, however, that a lack of market conditions can lead us away from allocative efficiency. One response to market imperfections is to have governments intervene to correct the imperfections. The problem is that markets have imperfections of their own. In this unit, we will investigate some suggested roles for government in the economy, discuss government imperfections, and help students understand the question, Which is preferable, the results of imperfect markets or the results of government intervention in imperfect markets? The intention is not to give a general answer to the question, but to help students investigate the issues in specific situations when governments are involved in markets. The Role of Government What role should government play in a market economy? While obviously controversial, major areas where government intervention in the economy is considered include correcting market imperfections by: setting the rules for trade defining and protecting property rights providing public goods and services redistributing income determining monetary and fiscal policy California Council on Economic Education, 2005 UNIT 15: GOVT. & PUBLIC CHOICE 15.1

9 Externalities In Unit 14, we found that private markets will under-allocate resources to those activities where external benefits exist and over-allocate resources to those activities where external costs exist, preventing the market from achieving allocative efficiency. The question is whether the government should intervene in these situations and, if so, how. Markets where governments often intervene are those with external costs such as fire protection. If your neighbor s house burns and she does not have fire protection, the flames are likely to extend to your house which may also burn down. As a result, you want your neighbor to have fire protection. Since she is unwilling to pay for it, governments often force her to do so by taxing everyone including her and using the tax revenue to extend fire protection to all citizens. Education provides external benefits to citizens. Youngsters who are educated are more productive and provide more products at lower prices for all consumers. As a result, we all benefit from Sally s education. But, since Sally may be unable or unwilling to pay for that education, the government taxes all citizens and uses those tax revenues to subsidize Sally s education. Public Goods and Services The government provides many different goods and services. Some are produced by government because they have benefits to society that outweigh their costs, but there are insufficient incentives for private markets to provide them at all. Whether government provides them or not, however, there are some goods that are called true public goods. They are public goods, not because government does (or does not) provide them, but because of their characteristics. To understand true public goods, it is necessary to understand two characteristics inherent in the products we consume. These products are either rival or non-rival and they are either exclusive or non-exclusive. Rivalry vs. non-rivalry in consumption Consider the following situations: A young couple bidding on a house that is just right for them waits expectantly to hear from their real estate agent. When the call finally comes, they are disappointed to hear that another bid has been accepted. A teenager sees a used car that she has to have. She discusses it with her parents who agree that the car is a good deal and she goes back to make the arrangements only to find that the car has already been sold. Two people are looking over the peaches in a grocery store and both spy a particularly nice one at the same time. One grabs it; the other doesn t get it. These are examples of rival goods. A rival good (or service) is one that can only be consumed by one consumer (or a specified group of consumers) at one time. If one person or group consumes the product, it is not available for others. As a result, consumers bid against each other providing incentives for suppliers to supply the product. Usually, these types of products are supplied by private markets which, when competition, incentives, information, and property rights exist, achieve allocative efficiency. On the other hand, some goods are considered non-rival in consumption. A non-rival product is one that can be used by more than one consumer (or a specified group of consumers) at one time. For example, several hundred people can attend a movie showing, and each consumer sees the same movie at the same time. A college lecture is another example of a non-rival product. One student sitting in the classroom does not exclude others from sitting in the classroom until the seating capacity is reached. Drinking water from a mountain stream and viewing fireworks displays are also examples of non-rival products UNIT 15: GOVT. & PUBLIC CHOICEL California Council on Economic Education, 2005

10 Exclusive and non-exclusive products An exclusive good or service is one where consumers who don t pay for the product can be excluded from consuming it. For example, consumers who don t pay for a professional baseball game can be kept out of the ball park. Only consumers who pay for a house will be able to own it. In other words, if a person doesn t pay for a product, the supplier can exclude that person from owning or using it. The exclusion characteristic means that the good can be fenced off so that nonpayers are unable to use it. If you won t pay for a skateboard, the supplier will exclude your use of the skateboard. If you won t pay for a shirt or pair of shoes, the supplier excludes you. Suppliers can exclude consumers from taking cereal, cars, plumbing services, etc. A non-exclusive good or service is one from which non-payers can t be excluded from its use. A person who provides tornado warnings can t exclude people from hearing the sirens. Firms that remove snow from country roads can t clear the road for some people and not clear the same road for others without incurring prohibitive enforcement costs. Other examples include fireworks and outdoor concerts, street lights, road repairs, and national defense. Non-exclusive products are characterized by the free rider problem. Consumers who can t be excluded from consuming the product can t be made to pay; they can consume the product for free. True public goods are those that are non-rival and non-exclusive. In the case of public goods, because of non-exclusion, suppliers can t collect revenues to cover the costs of producing the product so there is no incentive for them to produce it. If the good is important for society to have, then it may be appropriate for government to provide the products, paying for them through tax revenues. Products that are often cited as examples of true public goods include national defense, lighthouses, immunizations, fire and police protection, trash pickup, roads, consumer information, education and others. With the exception of national defense, there is disagreement over whether the others are, in fact, true public goods. The significance of the controversy lies in the question of whether government or private producers should supply them. Many of these goods have been provided both by government and by private suppliers at different times and in different places. The table below summarizes categories of goods. Remember, the nature of a public good stems from non-rivalry and non-exclusion, not from the fact that the government does or does not provide the product. Private goods are goods that are rival and exclusive. Common Resources Besides true public goods, governments often intervene in markets where common resources such as those discussed in Unit 13 including fish, whales, and forests are involved. Common resources are not considered pure public goods because they may be rival in consumption but are clearly non-exclusive. In other words, only one crew can kill and own the meat to a particular whale; once the whale is theirs, rivals can not own the whale. But it is difficult to exclude people from killing whales; it is not practical to try to fence them off. Common resources, as mentioned in Unit 13 are faced with the Tragedy of the Commons. When it is not possible to establish property rights to these resources, government often attempts to limit the use of the common resource through such activities as: issuing fishing and hunting licenses, establishing minimum sizes for fish, limiting fishing and hunting seasons, limiting the number of animals killed or entering into international agreements. These activities may be effective in controlling the use of the resource as long as the enforcement costs are not prohibitive. Fishers could agree to limit catches as part of a cooperative agreement but they must be able to control new entrants. The smaller the group of fishers, the more stable the resource, the easier this is. California Council on Economic Education, 2005 UNIT 15: GOVT. & PUBLIC CHOICE 15.3

11 Public Choice As mentioned at the beginning of this unit, it is often argue that there are legitimate roles for government in the economy and that those roles include the following: setting the rules for trade defining and protecting property rights providing public goods and services redistributing income determining monetary and fiscal policy But the necessity and efficiency of government intervention is a controversial economic and political issue. Just as markets have characteristics that prevent them from achieving efficiency, government intervention in markets may have unexpected consequences. Dr. James M. Buchanan received the 1986 Nobel Prize in Economics for the work that he did with Gordon Tullock on Public Choice Theory, which applies economic principles to the political process and analyzes how government resource allocation decisions are made. Since it is assumed that private-market failure is a reason for some government intervention in markets, public choice theory considers how well the government performs when it replaces or regulates a private market. The discussion revolves around two questions: 1. What characteristics of government stand in the way of efficient outcomes? 2. Which outcome is better, the imperfect market solution or the imperfect government solution? Until these two questions have been addressed, it is not clear that government intervention is necessarily the better solution. Applying economic reasoning to the political theater implies investigating the incentives of different political actors such as voters, bureaucrats, and elected officials. What incentives and situations exist that lead to inefficient government actions? Below, we discuss the incentives of the three groups mentioned. Voters Rational ignorance. In California, this is a particular problem. There are often so many initiatives on the ballot that it is virtually impossible to understand them all. As a result, many voters simply throw up their hands and say, I don t know. They may then vote from a position of ignorance or not vote. The point is that the cost of expending the human capital to understand the proposition is greater than perceived benefits from the outcome of the proposition. So voters often enter the voting booth from a position of rational ignorance. Special interests. Some groups do care very much about the outcome of particular initiatives. As a result, they will marshal their forces to vote for or against the proposition. These groups, then, will have a greater influence on the outcome because of the strength of their interest in the particular issue, while those who are rationally ignorant step aside. While some of these special interest groups are obvious (e.g., the National Rifle Association, the American Association of Retired People) others are not. Many economic policies are voted on because the cost to voters is dispersed, hidden, and minimal per voter, while the benefits to particular interest groups are large, visible, and significant. Policies that protect certain producers such as automotive workers or tobacco farmers are examples. It has been estimated that it costs approximately $90,000 annually to protect 15.4 UNIT 15: GOVT. & PUBLIC CHOICE California Council on Economic Education, 2005

12 U.S. automotive workers from losing their jobs to foreign automobile producers. But the typical voter never sees the dollar cost and is only slightly affected by it. On the other hand, automotive workers know very well which politicians have voted to protect them and which have not. Tyranny of the Majority. With direct elections, it is often the case that the majority votes for issues that are, in fact, against the public interest. To illustrate inefficient voting outcomes, consider: Should the Town build a new skateboard park? For simplicity, let s use 3 voters, Jackson, Jeff, and Jennifer, to represent the town s voting population. Each voter will share the cost of the park by paying a tax. Jackson skateboards and while he wouldn t use the park, he thinks younger kids would and wished there had been a park when he was younger. Jeff doesn t skateboard, but he thinks it might be OK for the Town Jennifer doesn t skateboard, doesn t understand the need for the park, and doesn t want to pay more in taxes. The table below represents the cost of the choice, the benefit to each voter, and whether they will vote for a new skateboard park. COST TO EACH VOTER BENEFIT TO EACH VOTER HOW THE PERSON VOTED VOTER Jackson $200 $250 Yes Jeff $200 $201 Yes Jennifer $200 $ 0 No Total Cost/Benefit $600 $451 of Skateboard Park The total benefit to the town of the skateboard park is $451, the cost is $600. The park should not be built. Since the votes can t reflect the value to each voter, it is not possible to calculate the total value and the skateboard park will pass. There are many instances when a simple majority vote will promote policies that actually go against the public interest. Elected officials Logrolling. The best intentioned elected officials can t get much done by themselves; they will always need the votes of their colleagues to pass legislation. As a result, they will often vote for policies that they know don t promote the general interest to obtain votes for their constituents on another issue. This is sometimes referred to as You scratch my back, I ll scratch yours. Timing. Many officials must run for re-election every two years, some every four, others every six. To be reelected, they must convince voters that they can deliver the goods. So policies where the benefits may greatly outweigh the costs but don t begin to pay off for a long time are less likely to be voted on. In general, a policy bias exists in favor of policies where the benefits are short run and the costs are long run. Benefits not identified with legislation. If the benefits are also difficult to attach to the particular legislation, the issue becomes even more difficult. An example is public funds for prenatal care for the poor. Since the poor are often unable to take the necessary health treatments during pregnancy, they are far more likely to end up requiring emergency care during birth and the baby may require emergency care afterwards. Since emergency care is far more expensive than prenatal care and since the emergency care is usually provided with public funds, it is efficient to provide the prenatal care. The problem is that the payoff from such a policy is difficult to identify. How will the number of emergency room visits avoided due to prenatal care be documented? California Council on Economic Education, 2005 UNIT 15: GOVT. & PUBLIC CHOICE 15.5

13 Research on health issues is difficult to fund publicly since the payoff may be many years down the road. Distribution of benefits and costs. If the benefits of legislation accrue to a powerful group with a large number of members who vote, and the costs accrue to a group whose members do not vote, then policies that may be best for society may not be implemented since those who would benefit don t vote. Since the poor tend to vote less than other groups, many policies that would benefit the poor and society in the long run do not become policy. Bureaucrats No competition. One of the major constraints for businesses is competition. If prices are too high, customers can go to other providers for a better deal. With government monopolies such as the Postal Service, there is little competition so the incentive to lower costs is not as great as would be the case with competition. Pay. Some officials are paid according to the size of their staff. As a result, the incentive structure suggests that they should hire as many workers as possible with no incentive to reduce labor costs. Spend it or lose it. Since many budgets are based on one year, funds that have been allocated to an agency will be given up if they are not spent by the end of that year. The incentives suggest that all allocated funds will be spent by the end of the budget cycle, whether usefully or not. In addition, next years allocation is often based on this years spending, so further incentives exist to spend the entire budget. The bottom line: when markets are not allocating efficiently, is the market outcome or the government outcome the better of the two? The proper question is not whether government is too big; the proper question is where government should be involved in the economy. The simplistic answer is that government should be involved where the marginal benefits of additional government involvement outweigh the marginal opportunity cost. Unfortunately, the estimation of those benefits and costs are far from simple UNIT 15: GOVT. & PUBLIC CHOICE California Council on Economic Education, 2005

14 Main Points: Suggested roles for government in the economy include setting the rules for trade, defining and protecting property rights, providing public goods and services, redistributing income, and determining monetary and fiscal policy. A non-rival product is one that can be used by more than one consumer (or a specified group of consumers) at one time. A non-exclusive good or service is one from which non-payers can t be excluded. A pure public good is both non-rival and non-exclusive. Situations that may lead to inefficient government outcomes include: rational ignorance special interests tyranny of the majority logrolling timing benefits not identified with legislation distribution of benefits and costs lack of competition pay linked to size use it or lose it Bulletin Board Quotes: Lobbying is big business Majority votes can lead to inefficient outcomes Special interests may promote the interests of a small group at the expense of society at large Learning Hurdles Incorrect Statement All goods and services provided by the government can only be provided by the government. That is why they are called public Markets fail so government takes over and is successful because a democratic government is comprised of elected officials who try to improve society. Correct Statement Some goods provided by the government are also provided privately. A true public good is both nonrival and non-exclusive. It is a public good whether it is provided by the government or not. Governments can fail due to the incentives and situations listed in this unit. California Council on Economic Education, 2005 UNIT 15: GOVT. & PUBLIC CHOICE 15.7

15 MULTIPLE CHOICE QUESTIONS 1. Which of the following is NOT usually considered a proper role for government? a. Providing public goods and services b. Safeguarding corporate profits c. Defining and protecting property rights d. Setting the rules for trade 2. Which of the following would be considered a non-rival product? a. an apple b. dinner at a restaurant c. a movie d. art supplies 3. Which of the following would be considered a non-exclusive good or service? a. rock concert in Staples Center b. World Series game c. road maintenance d. Big Mac 4. A true public good would have which of the following characteristics? a. exclusive and rival b. non-exclusive and non-rival c. exclusive and non-rival d. non-exclusive and rivala 5. Which of the following promotes efficient government in the sense that the public good is promoted? a. logrolling b. educated voters c. special interests d. pay linked to size 15.8 UNIT 15: GOVT. & PUBLIC CHOICE California Council on Economic Education, 2005

16 Answers to Multiple Choice Questions 1. b 2. c 3. c 4. b 5. b Resources NCEE: Focus: High School Economics; Lesson 14 Public Choice: Economics Goes to Washington and into the Voting Booth NCEE: Focus: High School Economics; Lesson 12 Public Goods and Services NCEE: Civics and Government Focus on Economics; Lesson 13 Whose Interest is Being Served? NCEE: Economics and the Environment Eco Detectives (Schug, Morton, Wentworth); Unit IV, Lesson 15 Save the Babies NCEE: Economics and the Environment Eco Detectives (Schug, Morton, Wentworth); Unit IV, Lesson 16 Why Would People Cut Down Trees in a Public Park? NCEE: Economics and the Environment Eco Detectives (Schug, Morton, Wentworth); Unit IV, Lesson 17 The Mystery of the Disappearing Christmas Trees NCEE: Economics and the Environment Eco Detectives (Schug, Morton, Wentworth); Unit IV, Lesson 18 What is Worth Recycling? NCEE: Economics and the Environment (Anderson); Unit 3; Lesson 7 We re All In This Together NCEE: Economics in Action 14 Greatest Hits for Teaching High School Economics; Lesson 5 The Role of Government in a Market Economy NCEE: Focus: Institutions and Markets; Lesson 7 Public Goods and Externalities California Council on Economic Education, 2005 UNIT 15: GOVT. & PUBLIC CHOICE 15.9