economics presentation - ntl defense

7/27/2019 Economics Presentation - Ntl Defense

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Market Failure Justifies

Government Intervention forPublic Goods

(National Defense)

June 13, 2013


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Overview

Introductions What are public goods? Government Role in Providing Public Goods

Free Rider Problem What is National Defense? National Defense as a Public Good Should the government provide National Defense? Overall Proposed Government Spending for 2013

Overview of Government Spending on National Defense Why is so much spent on National Defense? Why does the government provide National Defense? What if National Defense was not a Public Good?

Cost-Benefit Analysis

Conclusion


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Introduction

When markets do not bring about economic efficiency,market failure occurs.

Due to market failure, the government has to step in andprovide certain goods to society.

National Defense is provided to society as one of thesepublic goods.


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What are Public Goods?

A good that individuals cannot be excluded from and whereuse by one individual does not reduce availability to others.

Must meet two criteria:o Nonexcludability - cannot keep non-payers from enjoying the

benefits of the goodso Nonrivalrous consumption - consumption of the good by one

person does not reduce the amount available for others toconsume

Marginal production costs are zero Examples: fresh air, street lighting, public parks, and national

defense


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Free Rider Problem withPublic Goods

Occurs when consumers benefit from a particular good anddo not contribute towards the goods production.o

Because public goods are non-excludable, consumers cannotvoluntarily pay for the good, or opt not to pay for the good.

Public goods are not produced by private firms and thegovernment chooses to intervene and produce.o If enough consumers decide not to pay for this public good, then

the service will potentially be underproduced or not produced at all.

Not knowing the optimal quantity demanded for optimalproduction of public goods leads to Market Failure.


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Government's Role in ProvidingPublic Goods

The government needs to step in and provide public goodswhen there are inefficiencies in the market which result inmarket failure.o Market Failure - a situation where the quantity of a product

demanded by consumers does not equate to the quantitysupplied by suppliers. This occurs due to a lack of certaineconomically ideal factors, which in turn prevents equilibrium.

One of the most significant public goods provided by thegovernment is National Defense.


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What is National Defense?

National Defenseo programs for military and energy production or

construction, military or critical infrastructure assistanceto any foreign nation, homeland security, stockpiling,space, and any directly related activity, includingemergency preparedness. Encompasses both national and foreign relations

Current National Defense Program in U.S.o No one is excluded and it is provided to society

as a whole


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National Defense as a PublicGood

Government provides public goods to correct for marketfailure.

Government believes that national defense is importantand funds this service through the imposed federaltaxation policies.o It protects the Nation (i.e. lives, property, state, and

freedom).o It is a service that provides social benefits to everyone

regardless of the demand.o Not everyone may receive equal benefits but they do

receive the benefit where they cannot be not excluded.


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Overall Proposed GovernmentSpending for 2013


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Overview of GovernmentSpending on National Defense

Federal Budget Currently spent on National Defense:o The Department of Defense (DoD) requested $535 billion in

funding for 2013a one percent increase over its 2012

funding. CBO analyzes the budgetary implications of DoD'sdefense plans, including military personnel, weapon systems,and operations.

It would be nearly impossible for a private firm to provide thisamount of capital.

The Free-Rider Problem makes it impossible for firms togather sufficient resources and profitably provide NationalDefense to society.


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Why is so much spent onNational Defense?

New Technology

Military Base Upgrades

Cost of Training New Equipment Increase in Military Pay Cyber Security Research and Development


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Why does the governmentprovide National Defense?

Because of market failure, the market isn't able to produceNational Defense efficiently and the government steps in.

Allows for better access to information about when, where,and how to recruit and deploy national defense.o Centralization eliminates possibility of not providing protection for all.o If privatized, firms would not profit because MC>MB due to free-

riders and non-rivalrous consumption.

o Individual buyers and sellers lack information on price and demand.o If buyers decided not to pay for, and opt out of, national defense,

national defense may not be made available and it would cease to

be a public good.


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What if National Defense wasnot a Public Good?

Society on its own would not provide equal protection foreveryone and neither would firms in the market.o As a result, private militias would form and some members of

society would form vigilante efforts

Individuals acting privately would produce too little from thestandpoint of society as a whole.

Each person would provide national defense until theincremental benefits equaled the incremental costs.o Externalities - occur when one person's actions affect another

person's well being and the relevant costs and benefits are not

reflected in the marketplace


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Cost-Benefit Analysis forProviding National Defense

If society were to provide National Defense, the costs wouldexceed benefits (MC>MB) and society would be losing morethat it would gain due to:o Goods being too costly for consumerso No guarantees on organization of resourceso Cannot ensure that it would not be provided

to all of society

When government provides National Defense:o The benefit obtained from the public goods exceedsthe cost of having fewer private goods (MB>MC)

When the government supplies National Defense as a publicgood, society receives the maximum net benefit.


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Conclusion

Market failure justifies the need for the government becauseif the government did not provide public goods, such as

National Defense, firms in the market would not be able toeffectively and efficiently provide these goods on their own

due to overall cost of production, financial limitations, and

non-rivalrous consumption.

Thus government intervention for public goods is in societysbest interest when market failure occurs.


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Research Links

http://www.econlib.org/library/Enc/Defense.htmlo The Economic Encyclopedia on Defense as a Public Good

http://www.econlib.org/library/Enc/PublicGoods.htmlo The Economic Encyclopedia on Public Goods

http://www.econlib.org/library/Enc/PublicChoice.htmlo The Economic Encyclopedia on Public Choice

http://www.constitution.org/pd/gunning/issues/econ/topics/ndpubgd.htmo

Article "Is National Defense a Public Good?" http://www.sdvfp.org/us-military-spending/o Article on Military/Defense Spending in the US

http://highered.mcgraw-hill.com/sites/dl/free/0073375691/627557/Chapter16.pdfo Public Goods, Externalities, and Information Asymmetries

http://wps.pearsoned.co.uk/ema_uk_he_sloman_econbus_3/18/4748/1215583.cw/o Chapter 20: Reasons for government intervention in the market

http://www.tutor2u.net/economics/content/topics/marketfail/market_failure.htmo Explaining Market Failure

http://definitions.uslegal.com/n/national-defense/o Defines National Defense http://www.whitehouse.gov/the-press-office/2012/03/16/executive-order-national-defense-resources-preparedness http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=public+goods:+efficiency
http://www.econlib.org/library/Enc/Defense.htmlhttp://www.econlib.org/library/Enc/PublicGoods.htmlhttp://www.econlib.org/library/Enc/PublicChoice.htmlhttp://www.constitution.org/pd/gunning/issues/econ/topics/ndpubgd.htmhttp://www.sdvfp.org/us-military-spending/http://highered.mcgraw-hill.com/sites/dl/free/0073375691/627557/Chapter16.pdfhttp://wps.pearsoned.co.uk/ema_uk_he_sloman_econbus_3/18/4748/1215583.cw/http://www.tutor2u.net/economics/content/topics/marketfail/market_failure.htmhttp://definitions.uslegal.com/n/national-defense/http://www.whitehouse.gov/the-press-office/2012/03/16/executive-order-national-defense-resources-preparednesshttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=public+goods:+efficiencyhttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=public+goods:+efficiencyhttp://www.whitehouse.gov/the-press-office/2012/03/16/executive-order-national-defense-resources-preparednesshttp://definitions.uslegal.com/n/national-defense/http://www.tutor2u.net/economics/content/topics/marketfail/market_failure.htmhttp://wps.pearsoned.co.uk/ema_uk_he_sloman_econbus_3/18/4748/1215583.cw/http://highered.mcgraw-hill.com/sites/dl/free/0073375691/627557/Chapter16.pdfhttp://www.sdvfp.org/us-military-spending/http://www.constitution.org/pd/gunning/issues/econ/topics/ndpubgd.htmhttp://www.econlib.org/library/Enc/PublicChoice.htmlhttp://www.econlib.org/library/Enc/PublicGoods.htmlhttp://www.econlib.org/library/Enc/Defense.html

economics presentation - ntl defense

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