Public goods and market failure

Should the Government provide public goods?

1. The non rival nature of consumption provides a strong case for the Government rather than to provide and pay for public goods. 2. Many public goods are provided free at the point of use and funded by taxation or a charge e.g BBC licensing fee. 3. State provision may help to prevent under provision and under consumption of public goods so that social welfare is improved. 4. If the Government provides public goods they may be able to do so much more efficiently because of economies of scale. 5. Providing essential goods helps improve affordability and access to important services for lower income households and therefore help address inequalities of income e.g. 6. However if the Government becomes a monopoly power, there is a danger of lack of efficiency arising from a lack of completion 7. In some cases the state will fund and the private sector provides public goods e.g. public private partnerships.

What is a cost benefit analysis?

A process used to measure used to estimate the net social rate of return from an investment project.

What is a public good?

A product that one individual can consume without reducing its availability to another individual, and from which no one is excluded.

What is the free rider problem?

A situation where public goods are under-provided or not provided at all because individuals are able to consume the good by paying little or nothing towards the cost.

Why is encryption used?

Allows suppliers to exclude non-payers although the product remains non rival.

How can consumers manipulate the public sector?

Consumers have an incentive to not reveal their willingness and ability to pay for public goods if they believe that they will be expected or required to contribute to financing the public good. E.g. TV licence dodgers, people who evade council tax but still receive local authority services.

What is meant by the non-rivalry of a public good?

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.

What are some examples of quasi public goods?

Other examples that have an element of excludability or rivalry are Motorways and major roads, Parks, Police, Museums .

How is technological progress making roads a private (excludable) good?

Reducing the cost of smart metering.

Examples of public bads?

Something that has negative externalities on people and their community leading to a loss of social welfare e.g. global inequalities, spread of infectious diseases

What is meant by the non-excludablitiy of a public good?

The benefits derived from pure public goods cannot be confined solely to those who have paid for it. 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. E,g firework displays

What is mean by the non-rejectablitiy of a public good?

The collective supply of a public good for all means that it cannot be rejected by people, a good example is a nuclear defense system or flood defense projects.

What is hard to protect?

The nature of public goods is that it is hard to protect property rights - a reason why the private sector does not provide them.

What are public bad?

The opposite of a public good - it provides disutility or dis-satisfaction to people when consumed and therefore reduces our economic welfare. A good example to look at would be the disposal of household and commercial waste

Why aren't public goods provided by private markets?

•Markets cannot provide the incentives needed to supply essential services, such as policing and defence, causing allocative inefficiency. •Hence public goods are provided collectively by Government and financed through general taxation or other forms of charge e.g. the BBC license fee.

Why does the state provide public goods ?

•On the grounds of equity - people on all levels of income have access e.g. schools •On grounds of efficiency - Easier to provide them collectively, economies of scale from providing to all. •To overcome the free rider problem and the failure of the market to provide sufficient public goods. •Even though the state may finance these goods, others can provide them at the point of need.

Can the private sector provide public goods?

•Yes. •Groups of neighbours pay voluntarily pay for local security patrols at night. •This is because they value the public good nature of the service highly •Voluntary donations to organisations providing public services - examples of altruism (willingness to do things that bring advantages to others)

What are global public goods?

Goods with benefits and/or costs that potentially extend to all countries, people, and generations. e.g. eradication of smallpox, agreements for protection of ozone layer.

What kind of processes will be involved in a cost benefit analysis?

Identify private and external benefits and cost, consider distributional effects e.g. inequality, consider opportunity costs etc.

What are digital rights requirement?

It is a means of making a product excludable

What are the 3 characteristics of a public good?

Non excludable, non rival, non rejectable

What are quasia public goods?

They have characteristics of both private and public goods, including partial excludability, partial rivalry ( e.g. a wifi network may become crowded) , partial diminishability and partial rejectability.

How can Governments decide what output of public goods / funding of public goods is appropriate for society?

They must estimate the net social benefits from making public goods available.

What are pure public goods not normally provided by the private sector?

They would be unable to supply them for profit.

What if public goods are provided for free to users?

•Demand will expand right along the demand curve •Some will overstate their demand for a services and over-come-it, putting pressure on public finances and creating excess demand •Putting a price on a public good means that users make some contribution towards cost. The price should reflect the marginal benefit that people get from the service