2.9: Market Failure- Public Goods

Question 1

Public goods

Answer 1

Collective consumption goods that are both non-rivalrous and non-excludable

Question 2

Non rivalrous

Answer 2

A persons consumption of the good does not limit the quantity or benefit available to others. The marginal cost of supplying the good to an additional person is zero

Question 3

Non excludable

Answer 3

Firms cannot exclude non-paying consumers from the benefits of consumption (national security, beaches, police, garbage)

Question 4

Free rider problem

Answer 4

• firms cannot prevent non-paying customers = no profit incentive
• demand does not technically exist
• under provision and over consumption
• over consumption leads to exploitation and tragedy of the commons
• increased negative externalities

Question 5

Government responses

Answer 5

• direct provision

- 3rd part contracting

Question 6

Arguments in favour of direct provision

Answer 6

• public good may not otherwise be made available
• large scale benefits, allowing gift to benefit form economies of scale and efficiency gains
• improves public well being regardless if income

Question 7

Arguments against direct provision

Answer 7

• cost to taxpayer
• government inefficiency
• opportunity cost
• loss of potential revenue for private industry = loss of employment
• government may not know best