Question

Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the output of public goods be increased if the economy is initially operating at a point inside the curve?

Short answer

To increase public goods, reallocate resources or use idle capacity if inside the curve.

Step-by-step solution

Understand the Production Possibilities Curve (PPC)

The Production Possibilities Curve (PPC) illustrates the maximum feasible amount of two goods that an economy can produce with available resources and technology. Typically, it shows the trade-off between two types of goods, in this case, public goods on the vertical axis and private goods on the horizontal axis.

Draw the PPC

Draw a downward-sloping curve on a graph with public goods on the y-axis and private goods on the x-axis. This curve shows different production combinations of public and private goods, assuming all resources are used efficiently. The curve typically bows outward, reflecting increasing opportunity cost.

Increase Production Along the Curve

If the economy is initially operating on the curve, increasing the production of public goods involves reallocating resources. Move upward along the curve which means you will have to decrease the production of private goods to produce more public goods.

Increase Production Inside the Curve

If the economy is operating inside the curve, it is not using all resources efficiently. To increase the production of public goods in this scenario, the economy can utilize idle resources or improve efficiency. This will shift the operating point closer to the PPC without sacrificing private good production, as initially, not all resources were used.

Key concepts

Public Goods

Public goods are unique in the way they are consumed by society. These goods are characterized by two main properties: non-excludability and non-rivalry. Non-excludability means that once the good is provided, it is not possible to prevent people from using it. Non-rivalry indicates that one person's use does not diminish availability for others. Examples include street lighting, national defense, and public parks. These are provided by the government since the private market may underproduce them due to lack of individual profitability.

When illustrating public goods on the Production Possibilities Curve (PPC), they are placed on the vertical axis. The challenge with producing public goods lies in efficiently allocating resources without diminishing private sector investments.

Private Goods

Private goods differ vastly from public goods with characteristics of excludability and rivalry. With excludability, producers can prevent those who do not pay from consuming the product. Rivalry means that consumption by one individual reduces the amount available for others. Examples of private goods include cars, clothing, and food.

In the Production Possibilities Curve (PPC) exercise, private goods are plotted on the horizontal axis. As resources are allocated to produce more public goods, the production of private goods typically decreases—reflecting the inherent trade-offs in economic decision-making.

Resource Allocation

Resource allocation represents the decision-making process regarding the division and usage of resources in an economy. Efficient resource allocation is vital for maximizing the utility derived from limited goods available. In a Production Possibilities Curve scenario, resource allocation determines how much resource is given to produce either public or private goods.

When an economy operates on the PPC curve, it means resources are utilized efficiently. Shifting resources can illustrate changes in priorities — for instance, increasing public goods at the cost of private goods. If the economy is inside the curve, exploring better resource allocation can push the economy outward towards the curve. Idle resources need to be activated to increase production while enhancing efficiency.

Economic Efficiency

Economic efficiency is reached when an economy is able to produce the maximum possible output using its available resources. On the Production Possibilities Curve (PPC), efficient points lie on the curve, while any point inside the curve shows inefficiency due to unused or poorly used resources.

To boost efficiency, strategies such as improving technology, enhancing skills, or reallocating resources from less productive uses are adopted. Operating on the PPC ensures that an economy makes the best usage of its resources, optimizing both public and private goods' availability based on societal preferences. In the context of a PPC, shifting from an inefficient point inside the curve to an efficient one on the curve embodies achieving economic efficiency.