Introduction into Public Sector...

Introduction into Public SectorEconomics

Aija Kosk

MSc in Environmental Sciences and Policy

Lecturer of the Tartu College of Tallinn Technical University

Project manager of Peipsi CTC

Learning outcomes

• Learner is able to explain simple and expanded flow diagram of economy;

• Learner is able to explain concept of public goods and problems related with their over-consumption;

• Learner is able to tie up market economy, public goods and public sector for mixed economy;

• Learner is able to notice ecosystem services and knows why this concept is introduced.

In the today’s worldeconomy dominates

[Professor Emeritus (Law) Jim Rollo, Sussex University]

The Theory of Moral Sentiments (1759)

• Topic of his cogitation and discussions:• People are selfish;

• People have an eye to the main chance.

• Main question he set up: • how to make people act so that they

would consider also society’s interests.

Adam Smith 1723 - 1790

Inquiry into the nature and causes of the wealth of nations (1776)

On competitive market the individual interest gives rise to better situation for society as whole,

as individuals are interested to produce as good products as possible and sell them as low price as possible.

Main principles of free market economy(according to A. Smith)

• Consumption is sole purpose of production;

• From existing limited resources have to produce only those goods that consumers buy;

• Main idea of production and consumption is to rise wealth of society;

• A mechanism that combines these conditions is market as self-regulating system („invisible hand“).

Flow diagramm of classical economy and mixed economy

•Mind map

Task!

•Who are the actors in the market economy?

•Households

• Enterprises

•What is the main aim of enterprise?

•Profit maximization

•What is the main aim of household?

•Welfare maximization

Task!•Describe in your own words what is the welfare

Welfare or well-being

• In the tradition of European culture welfare consist:

• good health

• comfortable living conditions

• personal freedom

• safe working conditions

• guarantees for unemployment. (Sotsiaaltrendid 3, 2004)

Welfare components

• Benefits or person’s ability to buy goods and services;

• Living environment that offers variety of opportunities or set of assets like:• Natural condition;• State financial resource;• Human-created capital: buildings, bridges, roads,

telecommunications;• Institutional capital such as government bodies, legal protection,

enterprises, knowledge resources;• Human capital and cultural capital.

Breakdown of welfare

1. Individual welfare or state in which all individual needs are satisfied.

2. Social or collective welfare or state in which social needs are satisfied.

• BUT

• In addition to needs people have desires, dreams, moods and many other aspects whose existence or absence affects the level of welfare.

• Different social groups define welfare differently.

What variables are involved in flowdiagramm of economy?

1. Goods and services

2. Money as exchange unit

Private goods and services

The private goods and/or services are any goods that offers satisfaction for consumers and are not freely available

Examples: food, soap and toothpaste, haircut, spa visit, etc

human resource, capital, land, ect.

Private goods and services

Private goods are characterised by two attributes:

• Rivalrous – it means that consumption by one consumer preventssimultaneous consumption by other consumers.

• Excludable - it means that it is possible to prevent consumption bythose who have not paid for goods.

Task!

• How we call the structure that allocates private goods and services?

• Market

• What is going on in the market of private goods and services?

• In the process of demand and supply forms the price of goods and amount of goods that consumers demand

• How?

•According to the theory of market economy themarket is self-regulating system and the most effective resource allocation mechanism.

• But …

Market failures

• Public goods

• Externalities

• Information failures

• Monopoly

• Competition failures• difficulties to enter the market

• advantages that comes on geographical location

• scale effect

• Imperfect markets

Public goods and services

• Public goods or services are that one individual can consume without reducing its availability to another individuals, and from which no one is excluded

Public goods and services

Public goods are characterised as:

• non-rivalrose – means that goods may be consumed tomore than one consumer;

• non-excludable - means that it is costly or impossible forone user to exclude others from using a good.

• Let’s look some examples

Wonderful views Source: https://www.matkajuht.ee/taevaskoja/

Diverse landscape Source: https://www.maavald.ee/

National Defence Source: www.õhtuleht.ee

Infrastructure Source: delfi.ee

Law machinerySource: uuseesti.ee; delfi.ee

Government governance Souce: kuma.fm

Task!

• Which of the following goods or services are non-excludable?

• Police protection

• Fierfighting

• Roads

• Primary education

• Cell phone service

Task!

• Which of the following goods are nonrivalrous in consumption?

• Historic buildings in the Old Town

• Laptop computer

• Public radio

• Ice cream cone

Specter of public goods

• Club goods (private park, golf field)• Non-rival for small users group, excludable

• Common goods (open access agricultural land, landscape)• Non-rival, exclude by high price

• Public goods (biodiversity, ozon laier)• Non-rival, non-excludable

• Private goods (bread, cellphone)• Rival, excludable

Poblems connected withconsumption of public goods

The Tragedy of the Commons

• Rational economic man maximizes the use of resources thatare freely accessible (public goods) as benefit that he/shegains belongs to him/her but loss is divided between all members of society.

• Garrett Hardin (1968) The Tragedy of the Commons. Science

The Tragedy of the Commons

• https://www.youtube.com/watch?v=0b2Tl0x-niw

Consequences of over-consumption of public goods

• Pollution is a substance or energy which features, location or quantity have an unacceptable effect on the environment orsociety;

• Pollution damage is damage that is caused by pollution;

• A negative externality is a cost that is suffered by a third party as a result of an economic transaction.

Externality

• Externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit (so called third party).

• A negative externality is a cost that is suffered by a third party as a result of an economic transaction.

• A postitive externality is a benefit that is enjoyed by a third party as a result of an economic transaction.

• Task!1. Have you experienced any negative externality? Draw a picture.2. Have you experienced any positive externality? Draw a picture.

Task!

• Who have to manage allocation of public goods and reduction of negative externalities?

• Public sector

Main aim of public sector policy

1. Regulate market with aim to improve efficiency of allocation of public goods

2. Regulate market failures with aim to protect social values and rights which is not guaranteed by the market.

Task!

• Which ministry deals with regulating market and market failures in field depicted on the following pictures?

Source: https://www.matkajuht.ee/taevaskoja/

Source: www.õhtuleht.ee

Source: delfi.ee

Source: uuseesti.ee; delfi.ee

Measures to implement public policy

1. Management measures:• “Command and control“ measures: restrictions, limitations,

norms, standards, permits, description of environmental use

• Economic measures: taxes, fees, subsidies, market insentives and fines.

2. Creating private property

3. Calculating economic value of ecosystem services and use this value in the social cost-benefit analysis to make a decision on allocation of public goods.

Ecosystem services

• Ecosystem services are goods and/or service offered by natural or semi-natural ecosystems and that meets the needs of society(households and enterprises)

Ecosystem services according to MEA (2005)

Regulating s.

- Climate regulation

- Water purification

- Biological control

Provisioning s. Cultural s.

- Recreation

- Spiritual experiences

- Inspiration

- Food

- Fiber

- Fresh water

- Construction materials

Supporting s.

- Pollination

-Soil foramtion

- Nutrient cycling

Ecosystem services according to TEEB

Regulating s.

- Climate regulation

- Water purification

- Biological control

Provisioning s. Cultural s.

- Recreation

- Spiritual experiences

- Inspiration

- Food

- Fiber

- Fresh water

- Construction materials

Habitat and supporting s.

- Habitat for species

- Maintenance of

genetic diversity

Ecosystem services

• Ecosystem services are direct and indirect contributions of ecosystems to human well-being or so called „final ecosystem services“

CICES (2013) Common Internationas Classification of Ecosystem Services

Ecosystem services according to CICES (2013)

Regulating s.

- Climate regulation

- Water purification

- Habitat for species

Provisioning s.

Cultural s.

- Recreation

- Spiritual experiences

- Inspiration- Food

- Fiber

- Fresh water

- Construction materials

Value of ecosystem (services)

• On the scale of the economic value ecosystem functions has neutral economic value;

• Ecosystem services that are needed by both households and entreprices has economic value.

• Ecosystem services has no price as price evolve into market as theresult of supply and demand.

• The economic value is calculated using indirect methods (contingentvaluation method, travel costs method, market price method, costsbased method ect)

Last task!

• See a video on write into the table ecosystem services that are mentioned in video.

• https://www.youtube.com/watch?v=BCH1Gre3Mg0

Feedback

• Learner is able to explain simple and expanded flow diagram of economy;

• Learner is able to explain concept of public goods and problems related with their over-consumption;

• Learner is able to tie up market economy, public goods and public sector for mixed economy;

• Learner knows the concept of ecosystem servicesand is able to notice them in the nature.