6) Public Goods - MMT Flashcards
What is the most prominent information failure leading to market failure?
The existence of merit goods and demerit goods
What is a third major example of market failure?
Incomplete or completely missing markets, in other words there is no market
When do missing markets occur?
When there is a big demand for a good or service but no free market business wants to provide
When do incomplete markets occur?
When there is is a big demand for a particular good or service but not enough private sector businesses are interested in meeting this demand
Most goods are…
Private goods
What is a private good?
Is what someone consumes the good, and then no-one else can consume that particular good
What are examples of a private good?
Cereal, chocolate, haircuts
For private , what sort of incentive is there?
There is a large profit incentive for privately owned businesses to meet the demand for the good or service
What are Public Goods?
Are commodities or services provided without profit to all members of society, usually by the government
In general why do private sector businesses not produce public goods?
In general, private sector businesses are not interested in providing these goods as they do not see that it is possible for them to make a profit from providing them
Who normally produces public goods?
Normally have to be provided by the government; otherwise, they wouldn’t exist
For pure public goods…
The market is missing
What are the 2 main characteristics of a pure public good?
Non-excludability and non-rivalry
What is non-rivalry?
Consumption of the good by one person does not reduce the amount available for consumption by another person; does not make it more difficult for someone else to consume it
What are examples of non-rivalry?
Listening to a radio station/street lighting
What is non-excludability?
Consumption by one individual makes it impossible to exclude any other individual from having the opportunity to consume
One non-excludability is provided…
No person can be excluded from benefiting (or suffering, like from pollution)
What are examples of non-excludability?
Eg driving on a public road; street lighting
What 2 other traits do pure public goods have?
1) zero marginal cost of production
2) non-rejectability
What does zero marginal cost of production mean?
Once a public good is provided, the cost of providing for one extra user is zero
What is an example of zero marginal cost of production?
Eg the UK armed forces defends the country. Just because one more family move to the UK the cost of defending the country does not change
What does non-rejectability mean?
Once a public good has been provided then the beneficiaries of that good cannot avoid consuming it
What is an example of Non-rejectability?
Eg if you live in England, you cannot choose to be defended by the USA instead
Pure public goods have all these traits:
- non-rivalry
- non-excludability
- zero marginal cost of production
- non- rejectability
What are the best examples of pure public goods?
- Defence of the country
- Street Lighting
- Flood barriers
- Light houses
What is a quasi-public good?
Is one that have some traits of public goods but not others
What is an example of a quasi-public good?
Eg public roads may be non-excludable but they’re not non-rivalrous - if they get too busy you can’t go anywhere
Why do public goods cause market failure?
Due to the existence of free riders
What is a free rider?
A consumer or business who benefits from a good or service but does not pay for it
With pure public goods, how do they charge users?
It is not possible to charge users for their individual use, if the army decides to charge individual households for defence and I paid up but my next-door neighbour refused, would they be less defended? No. This is why free rides exist
The existence of free riders means that private businesses are unable to…
Charge everybody who uses the service
