2.9 Market Failure - Public Goods

Question 1

What can a public good be

Answer 1

Non-rivalrous - consumption by one person does not reduce consumption by someone else
Non-excludable - it s not possible to exclude someone from using the good

Question 2

What is the free rider problem

Answer 2

People enjoy the use of a good without paying for it, arises from non-excludability: people cannot be excluded from using the good

Question 3

Government intervention to correct market failure to provide public goods

Answer 3

Direct goverment provision
Contracting out to the private sector

Question 4

Explain direct government provision

Answer 4

Government must step in to ensure that public goods are produced at socially desirable levels

Therefore public goods are provided by government

Governments must make economic decisions on what public goods should be provided

Question 5

Explain contracting out to the private sector

Answer 5

Government may provide public goods by contracting it out to a private firm

Contracting out by public sector to private sector occurs when government makes an agreement with a private firm to carry out an activity that the government was previously doing

E.x instead of hiring engineers to build roads, may contract construction out to a private construction firm