2.9 market failure - public goods Flashcards
public goods(2 characteristics)
Goods or services that have the characteristics
of non-rivalry and non-excludability, for
example, flood barriers.
private goods (2characteristics)
Goods and services that are simultaneously rivalrous and excludable.
rivalrous goods
goods and services where consumption by one consumer prevents/reduces ability of other consumers to consume it
e.g. rivalrous: apples
non: traffic light, flood gates, bridges
excludable goods
a good, service, or resource that is able to prevent or exclude non-paying consumers from experiencing or using it
e.g. flood gates, traffic lights
why are public goods a cause of market failure?
- if a good can be enjoyed by anyone, no one would want to pay.
- price mech unable to allocate resources
- free market is unable to provide public goods without intervention
examples of public goods
street lights
national security
lighthouses
air
policy and law enforcement
problem with public goods (prob+cause/why does it exist)
free-rider problem
exists because no one is willing to pay for a good or service when they think that somebody else will pay for it. This is why the good will not be provided by the free market.
free-rider problem
Arises when individuals consume a good or
service without paying for it because they
cannot be excluded from enjoying it.
govt provides good/services by using tax rev but all who dont pay taxes are still free-riders
free-rider
someone who benefits from a good or service without contributing to its cost
quasi-public good (2 kinds)
common pool resources
club goods
common pool resource
are goods and services that are rivalrous but non-excludable
not exclusive but use by one person will deprive another person’s future use of it
e.g. fish in the sea
club goods
Club goods are excludable but non-rivalrous.
can be excluded but use by one person will not deprive another person’s future use
no t good example of market failure (bc free market would provide)
examples of common pool resources
fish in the sea
forests
underwater basins
farmland
water
examples of club goods
museums
gated parks
park benches
cinemas
streaming services
government intervention in response to public goods
- government provision of public goods
- contracting out of private sector
government provision of public goods advantages and disadvantages (3+3)
advantages:
- improves social welfare as consumption is increased
- eliminates free rider problem
- can be more efficiently provided bc the govt, as a sole provider, can achieve economies of scale
disadvantages
- has to be finances -> generates opportunity cost
- govt provision may not be economically efficient, as the govt is unable to determine the optimal output
- some quasi-public goods, like toll highways, could be more efficiently provided by private firms
contracting public goods out of private sector
The government can pay the private sector to provide the good, rather than providing it directly themselves.
advantages
- The private sector can be more efficient than the government. The profit motive gives firms the drive to raise capital at the same time as being efficient. Even if the firms are monopolies that do not face any competition, they can still use their profits to achieve greater efficiency.
disadvantages
- However, the extent to which the private sector is more efficient is debated. According to research conducted by the European Public Service Union , there does not seem to be clear evidence that the private sector is more efficient than the public sector. This is because borrowing costs are higher for private firms, and they must also deliver profits for their shareholders. Both these costs must be met from sales to consumers. The government does not need to worry about borrowing costs or profits as much.
