View mindmap
  • 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.
    • 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


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Resource allocation resources »