2.9 - Public Goods

Question 1

Define public goods

Answer 1

Non rivalrous and non excludable goods that cannot be provided by the free market

Question 2

List the 3 market failures associated with public goods

Answer 2

• Free-rider problem
• high set up costs
• Merit goods

Question 3

Elaborate on free rider problem

Answer 3

Where people benefit from a good or service without paying for it. Public goods are not produced in the free market due to this.

Question 4

Elaborate on high set up costs

Answer 4

Very high initial set up costs

Question 5

Merit goods

Answer 5

Undervalued and under consumed

Question 6

List the two policies for public goods

Answer 6

• State provision
• Private sector operation

Question 7

Pros and cons of State provision

Answer 7

Pros:
- Only way they can be produced
- government makes them in accordance with public interest
- zero price so that they are available to low income households

Cons:
- The opportunity cost of providing and managing public goods
- possible inefficiency due to it being state run
- subject to political decision making
- impossible to know what level is socially efficient

Question 8

Pros and cons of private sector operations

Answer 8

Pros:
- operational management may be more efficient than government provision
- political decision making is less likely to take place

Cons:
- the opportunity cost of setting up the provision
- private sector firm may provide the service putting profit ahead of welfare
- Impossible to know the level of provision that is socially efficient