1.3.3 Public Goods

The diagram shows the labour market for unskilled fruit pickers in East Anglia. An increase in the national minimum wage (NMW) from 0W1 to 0W2 is likely to: A increase unemployment amongst fruit pickers. B cause an outward shift in the supply curve for fruit. C increase employment amongst fruit pickers. D increase the shortage of fruit pickers.

A • Definition or understanding of NMW e.g. legal minimum that employers must pay to workers (1 mark). • Original unemployment / excess supply N1N3 (1 mark) • New unemployment / excess supply N3N4 (1 mark) The above two points may be shown on the diagram • Employment falls / demand for labour falls from N1 to N3 (1 mark) • Supply of labour increases from N3 to N4 (1 mark)

What are public goods underprovided?

Because it is difficult to measure the value consumers get from public goods, so it is hard to put a price on the good. Consumers will undervalue the benefit, so they can pay less, whilst producers will overvalue, so they can charge more.

What are examples of pure public goods?

Clean air, defence, street lighting, the police service, the judiciary and prison service.

What is non-rivalry?

Consumption of the good by one person does not reduce the amount available for consumption by another person; sometimes this is also known as non-diminishability or non-exhaustibility

What does excludable mean?

Once provided it is possible to prevent others from using it, for example tickets to football matches.

What is non-excludability?

Once provided, no person can be excluded from benefiting, equally no person can opt out of receiving the good, which is known as non-rejectability.

Why are public goods not provided by the private sector?

The free rider problem

How are public goods different from private goods?

The marginal cost of providing a unit of the good is 0.

What is the free rider problem?

The non-excludable nature of public goods gives rise to the free-rider problem. Therefore, people who do not pay for the good still receive benefits from it, in the same way people who pay for the good do. This is why they are underprovided because they do not make a profit from providing the good since consumers do not see a reason to pay for the good, if they still receive the benefit without paying.

Which of the following forms of government intervention could correct market failure? A Rationing of public goods B Taxation of goods which yield high external benefits C Banning the consumption of luxury goods D Granting of subsidies to goods which yield high external benefits. Why?

Answer D (1 mark) • Definition of external benefits (e.g. positive third party effects / benefits external to an exchange / positive spillover effects / benefits from a transaction which the price mechanism ignores / difference between social benefits and private benefits) (1mark). OR • Definition of subsidy (grant to firms) / lower production costs (1 mark). • Application to goods / service which yield external benefits e.g. education and healthcare services. (1 mark). • Diagrammatic analysis showing the subsidy increase in output and decrease in price (this could be shown by an MSB and MPB diagram, where the social equilibrium output is higher than the market equilibrium output) (1 mark). • Also accept definition of market failure (price mechanism / market fails to allocate resources efficiently) (1 mark).

Dentists working in a market economy may undertake non-essential dental work on patients. A likely explanation for this is: A dental care is a public good B the existence of asymmetric information C significant external benefits result from dental care D there is a shortage of dentists

B • Explanation of asymmetric information (consumers have less market knowledge than producers) (1 mark). • Application e.g. consumed may not know appropriate dental treatment (1 mark). Any further development which might include another example (1 mark) • The producer may act in self-interest by conducting more treatment in order to gain more revenue / profits (1 mark).

Which of the following statements about public goods is true? A They are only provided by the price mechanism. B They involve no opportunity cost in their provision. C They are also known as 'free goods'. D They are characterised by the free rider problem. Why?

D • Definition of public good (a good which has non- rivalry and non-excludability characteristics) Also accept non-rejectable (1 mark). • Explanation of the free rider problem (once a public good is provided, it is impossible to prevent people who have not paid it consuming it) (1 mark) and further development which might include an example such as street lighting, pavement, national river flood scheme, sea defences (1 mark) • It is very hard to quantify and attach monetary values to the quantity of a public good each individual consumes (1 mark).

What does rivalrous mean?

It is a good where consumption by one person results in the good not being available for consumption by another.

What are public goods?

They are non-excludable so by consuming the good, someone else is not prevented from consuming the good as well, and they are non-rival so the benefit other people get from the good does not diminish if more people consume the good.

What are private goods?

They are rival and excludable. For example a chocolate bar can only be consumed by one consumer. Moreover, private property rights can be used to prevent others from consuming the good.

What are quasi (non-pure) public goods?

They have characteristics of both public and private goods. They are partially provided by the free market. For example, roads are semi-excludable, through tolls and they are semi-non-rival because consumers can benefit from the road whilst other consumers are using it (unless it is rush hour).