economics
- Created by: katier1234
- Created on: 15-12-19 14:31
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- Market Failure 1- Public Goods
- A public good is a commodity or service that is provided without profit to all members of a society usually by government
- Private goods are goods and services supplied and sold through markets by the private sector businesses
- Public goods are:
- Non excludability- The benefits derived from pure public goods cannot be confined solely to those who have paid for it. Indeed non-payers can enjoy the benefits of consumption at no financial cost – economists call this the 'free-rider' problem. With private goods, consumption ultimately depends on the ability to pay
- Non-rival consumption: Consumption by one consumer does not restrict consumption by other consumers – in other words the marginal cost of supplying a public good to an extra person is zero. If it is supplied to one person, it is available to all.
- Non-rejectable: The collective supply of a public good for all means that it cannot be rejected by people, a good example is a nuclear defence system or flood defence projects.
- examples of public goods
- education
- NHS
- Flood control systems
- Why are public goods an example of market failure?
- Pure public goods are not normally provided by the private sector because they would be unable to supply them for a profit.
- It is up to the government to decide what output of public goods is appropriate for society.
- To do this, it must estimate the social benefits from making public goods available.
- What is meant by the Free Rider Problem?
- public goods are non-excludable it is difficult to charge people for benefiting form a good or service once it is provided
- The free rider problem leads to under-provision of a good and thus causes market failure
- What are Quasi-Public Goods? A quasi-public good is a near-public good i.e. it has many but not all the characteristics of a public good. Quasi public goods are:
- Semi-non-rival: up to a point, extra consumers using a park, beach or road do not reduce the space available for others. Eventually beaches become crowded as do parks and other leisure facilities. Open access Wi-Fi networks become crowded
- Semi-non-excludable: it is possible but often difficult or expensive to exclude non-paying consumers. E.g. fencing a park or beach and charging an entrance fee; building toll booths to charge for road usage on congested routes
- The case for government intervention with public goods
- Overcoming the Free-RiderDirect provision of a public good by the government can help to overcome the free-rider problem which leads to market failure
- The non-rival nature of consumption provides a strong case for the government rather than the market to provide and pay for public goods.
- Many public goods are provided more or less free at the point of use and then paid for out of general taxation or another general form of charge such as a licence fee.
- State provision may help to prevent the under-provision and under-consumption of public goods so that social welfare is improved.
- If the government provides public goods they may be able to do so more efficiently because of economies of scale.
- Overcoming the Free-RiderDirect provision of a public good by the government can help to overcome the free-rider problem which leads to market failure
- Market failure- is when market mechanism leads to a misallocation of resources in the economy either completely failing to provide a good or a service or providing the wrong quantity
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