Market failure and Public, Private goods

What is a market failure?

A market fails when the market mechanism leads to a misallocation of resources in the economy. Therefore the market completely fails to provide a good/service or provides the wrong amount.

What is a public good?

A good which is non-excludable and non-rival. A public good is simply a good which can be consumed by anyone.

Explain why a lighthouse is a public good?

A lighthouse is a public good because anyone can use it, and if i use it, it doesn't stop you from using it simultaneously. Public goods lead to market failure because of it's characteristics.

What is a 'missing market'?

A missing market is a situation, where there is no market because the functions of prices have broken down.

You're probably thinking, why can't public goods be provided commercially (sold)?

Public goods cannot be provided commercially because of its characteristics. If provided commercially, It's non-rivalry means that someone else could consume the benefits of a good which you and I have purchased. As well as, it's non-excludability means that others can free-ride, therefore it is impossible to collect enough revenue to cover private costs.

When does a missing market occur?

A missing market occurs when a good/service is too cheap, therefore it is over-produced and over-consumed. A missing market also occurs in a monopoly when a good/service is too expensive, therefore it is under-produced and under-consumed.

What is a private good?

A private good is a good which is both excludable and rival. Although, a private good is simply a good which is private property, meaning it belongs to single consumer. e.g. a juice carton in a store belongs to the shopkeeper. Your house belongs to you. A street-lamp (public good) does not belong to a single consumer.

What is the difference between a 'pure-public' good and a 'quasi-public' good?

A pure public good is a good which is impossible to exclude free-riders from. e.g. the national defence. The national defence cannot simply protect chosen individuals, it protects everyone or no one. A quasi-public good (also known as non-pure public good) is a good which can possibly exclude free-riders and if i use it, it doesn't mean you can necessarily still use it. e.g. roads, roads sometimes have toll gates which charge you to enter those specific roads (excludable) and there may be so much congestion that you cannot use the road, therefore it's not fully non-rival.

What is a 'quasi-public good'?

A quasi-public good is a good which is not fully non-rival and/or it is possible to exclude people from consuming the product.

Why are the very few pricing schemes?

Because politicians fear they will not get re-elected if they try to bring in road pricing schemes.

What does 'excludable' and 'rival' mean in terms of a good?

For a good to be 'excludable', it means that one can prevent another from using the good or consuming its benefits. e.g. a shopkeeper can prevent people from consuming the goods on display in his/her shop. For a good to be 'rival', it means that if one consumes a good another cannot consume that same good. e.g. if i eat a chocolate bar, someone else cannot eat that same chocolate bar. Whereas if i use a street-lamp (public good), someone else can also use it.

Why do public goods lead to market failure?

Public goods lead to market failure because of it's characteristics. Being non-excludable and non-rival means that the provider of the good cannot charge 'everyone' who consumes the good's benefits. This allows individuals to free-ride, meaning they consume the benefits of a good without paying a cost. Because of these characteristics, it makes it impossible to collect enough revenue to cover private costs therefore profits cannot be made and the incentive to provide the good/service disappears. Consequently, the market fails to provide a good/service which is needed.

When does market failure occur?

When one or more of the four price functions breaks down.