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Q0 Why Government in the First Place?
A0 Creating Institutions and Defending Them.

• Nozick The Minimal State
• A minimal state, limited to the narrow functions
  of protection against force, theft, fraud,
  enforcement of contracts and so on.
• No trade without having property rights and
  enforcing them!

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According to the system of natural liberty, the
sovereign has only three duties to attend to
three duties of great importance, indeed, but
plain and intelligible to common understandings
first, the duty of protecting the society from
the violence and invasion of other independent
societies secondly, the duty of protecting, as
far as possible, every member of the society from
the injustice or oppression of every other member
of it, or the duty of establishing an exact
administration of justice and thirdly, the duty
of erecting and maintaining certain public works
and certain public institutions, which it can
never be for the interest of any individual, or
small number of individuals, to erect and
maintain because the profit could never repay
the expense to any individual or small number of
individuals, though it may frequently do much
more than repay it to a great society. Adam
Smith, The Wealth of Nations, Book IV, chapter IX
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Example 1 A Coordination Game

• Two ranchers (A raises sheep and B cattle).
• Two grazing pastures (1 better than 2)

A B Grazing on 1 Grazing on 2
Grazing on 1 3 3 4 8
Grazing on 2 8 4 2 2

• Equilibrium 4 or 8
• 8 4

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Example 2 A Prisoners Dilemma Game
A B Steals Does Not
Steals M-C M-C 0 2M-C
Does Not 2M-C 0 M M

• Equilibrium (Nash dominant strategy) M-C
• M-C
• A better outcome M
• M

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Q1 When Should the Government Intervene in the
Economy?
Market failure 2 Monopoly Market failure 3
Asymmetric information

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What Did We Learn?

• Public Economics is about the proper role of
  government in the economy, and the implications
  of its policies.
• Main role Minimal State
• Reasons for government intervention in the
  economy
• 1. Efficiency due to market failures
  (i) Monopoly, (ii) Externality, (iii)
  Asymmetric information.
• 2. Equity.
• How? (i) Taxes/Subsidies, (ii) Public Provision,
  (iii) Mandates and regulations.
• Other concepts Pareto superior, unintended
  consequences, a prisoners dilemma game.