Sample Paper on Intro to Economics: Positive and Normative economics

  1. Explain the difference between positive and normative economics. Give a real-time example of each that you found in doing some outside research.

Economics is both an art and science. As such, it comprises of both proven facts and fictional opinions from renowned economists. This division explains why economics is divided into two primary branches: positive and normative economics. The latter is fiction while the former is factual. Normative economics deals with non-factual opinions and positions held by economists. These opinions characterize what they think concerning a certain matter or occurrence. These opinions are non-verifiable and cannot be tested either. Positive economics, on the other hand, are both verifiable and can be tested. This economics can be proven at any time to be either true or untrue depending on the outcome of the test. The need for normative economics lies in the demand for future projections based on current happenings or facts. It is paramount to foremost know what the facts at our disposal are and then use these to guide our judgments concerning policies aimed at helping individuals or the society in the future. The facts are positive economics while our judgments become normative economics.

Other inherent differences between positive and normative economics pertain to their subject matter, underlying argument, and nature. The subject matter for positive economics is the causal-effect relationship while normative economics is judgments and opinions. The underlying argument in normative economics is objective while that of positive economics is subjective. Lastly, the nature of positive economics is descriptive while that of normative economics is prescriptive. An example of normative economics is a statement like globalization carries negative effects on underdeveloped countries. Positive economics is shown by facts such as the unemployment rate in the United States as of December 2018 was 3.9% (“United States Unemployment Rate,” n.d.). Positive and normative economics is very crucial to each other, they are mutually inclusive.

  1. After doing some additional research on your own along with the assigned reading on public goods, answer the following questions:
  2. What are the two main characteristics of this type of good?

A public good is a product or service that can be consumed without reducing the amount available to other people and cannot be withheld from others irrespective of whether they paid for it or not (“What are public goods?” n.d.). To better understand a public good it is paramount to compare it with a private good like a car. The buyer of the car has the ability to restrict any other person from using the car. Simultaneously, using the car reduces the possibility of someone else enjoying the service. A public good like fireworks is completely different from this car. The buyer and user of the fireworks cannot consume the whole good on his/her own since people will view the fireworks from their backyards and homes. Moreover, the user viewing the fireworks does not reduce the amount available for others to see. These differences between a private and a public good/service give rise to the two main characteristics of public goods: non-excludability and non-rivalrous.

Non-excludability means that it is impossible to prevent nonpayers from enjoying a public good/service. The fireworks example aforementioned clearly illustrates this characteristic. Both the payer and the non-payers enjoy the scene created by the fireworks. Another example is erecting a street light in a neighborhood. It is practically difficult to prevent non-payers from enjoying the services of the street light. The second characteristic of public goods, non-rivalrous, stems from the first characteristic. Let’s assume that the payer of the fireworks exhibition decides to exclude the non-payers from watching the exhibition by conducting it in a private field where only payers are allowed to watch. If the field is too large, however, the public will still end up watching the exhibition without reducing the degree of enjoyment of the payers or increasing the cost of the exhibition. This nature of public goods is commonly referred to as non-rivalrous. It means that one person’s usage of the good does not affect another person’s use.

  1. What is the biggest “problem” with allocating public goods?

The allocation of public goods gives rise to two problems: the tragedy of the commons and the free-rider problem. Nevertheless, the free-rider problem is the bigger problem of the two. The tragedy of the commons is well explained using grazing land as a public good. When populations are still small, there is plenty of grazing land and citizens are allowed to openly graze their flock. The land has the ability to replenish itself and allow for continuous grazing without any adverse effects. However, as the population rises so does the demand and number of the flock. The land becomes unable to replenish itself and the grazing lands end up suffering from overgrazing. To deal with this problem, there is a need to subdivide the grazing land into smaller units and allocating each citizen a unit. The citizen will then care and graze in this unit. The nature of the public to care less for public goods leads to the tragedy of the commons problem. This issue exists because most public goods are non-excludable but rivalrous in nature.

The free-rider problem is by far the biggest impediment with allocating public goods. Since these goods are non-excludable then it becomes hard to limit their consumption to payers only (Cowen, n.d.). Additionally, it is hard to forcefully charge non-payers as their consumption neither affects the cost or the marginal benefit of the good. The essential nature of these goods also influences the free-rider problem. Public goods like security and defense must be provided. While some people are willing to pay the cost, others will simply decide not to pay and still enjoy the good. This creates a less than optimal production of the good and consequently an undersupply.

  1. Do you think the government should have a role in allocating public goods, or should goods be privatized?

The decision of whether to privatize public goods or have them provided by the government is mainly dependent on the nature of public goods. Consider defense for example. If privatized, only a few people will choose to voluntarily pay for the service. However, all those within that jurisdiction will enjoy the service. Moreover, people constantly on tours may choose to limit their pay to the times they are present in the country. This creates an undersupply of the service since the collected funds may not be enough. It is also seemingly impossible to divide defense into units for each citizen to buy. It is, therefore, paramount that an impartial governing body like the government provides such a service and offsets the cost by levying a mandatory tax contribution upon each citizen based on their ability to pay.

It is economically unviable to privatize public goods because this would mean restricting its consumption to only one person. Additionally, it would also mean providing the good in buyable units so that those who pay more can enjoy more than those who pay less. This choice is economically sound since the marginal utility of the public good will be less than the marginal disutility of tax payments. For an efficient allocation of public good to happen, the marginal utility of the good must equal the marginal disutility of the tax payments (Ebeling, 2018). This calls for an all-inclusive tax system that can only be implemented by the government.

 

 

References.

Cowen, T. (n.d.). Public Goods. Retrieved from https://www.econlib.org/library/Enc/PublicGoods.html

Ebeling, R. M. (2018, March 07). The Fundamental Problem With “Public Goods” | Richard M. Ebeling. Retrieved from https://fee.org/articles/national-defense-and-the-fundamental-problem-with-public-goods/

United States Unemployment Rate. (n.d.). Retrieved from https://tradingeconomics.com/united-states/unemployment-rate

What are public goods? (n.d.). Retrieved from https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus/externalities-topic/a/public-goods-cnx