6.5 State Provision and Market Failure Flashcards
What is state provision?
State provision occurs when the state provides all resources in a given market free at the point of consumption using tax payer’s money to fund it.
What market failures can state provision solve?
State provision can solve the missing market problem with public goods and the under consumption and under provision of merit goods.
What is the missing market problem with public goods?
The missing market problem with public goods is that they would not be provided at all in the market, but state provision allows there to be a supply of public goods at the socially optimum level.
Why does state provision allow for universal access to education and healthcare?
State provision allows for universal access to education and healthcare because it can be argued that nobody should be excluded from consumption given how important both are for an individual’s standard of living and for the efficient functioning of society.
What is the socially optimum level?
The socially optimum level is the quantity of a good or service where the marginal social benefit is equal to the marginal social cost.
State Provision Diagram Analysis
The diagram shows how resources are now allopcated at Q*, the sociallly optimum, a supply fizxed by the government with a price of 0.
What is the problem of under consumption and under provision of merit goods?
There are two problems with merit good provision in the free market that state provision can solve. Firstly the state is assumed to maximise social welfare thus will consider all private and external benefits in the consumption of merit goods. As a result the quantity in the market will be fixed at Q1, the socially optimum level improving the allocation of resources and increasing welfare.
What are the cons of state provision?
The cons of state provision are that it is very expensive, the government must deal with excess demand, knowing the right level for the state to provide is difficult, state-run organizations tend to be highly inefficient, and there may be a role for the private sector.
Con: State provision is a very expensive policy
Cons/Evaluation
State provision is a very expensive policy. This is because the state provides all resources in the market with very little private sector involvement. There is a substantial opportunity cost involved surplus tax revenue does not exist. Perhaps cuts will be made to welfare or public transport worsening existing market failures and income inequality. Maybe regressive taxes will rise in the future burdening the poor and widening income inequality. These are difficulties the government faces if borrowing money is the only way to fund this policy. If the cost of state provision outweighs the gains in welfare, there will be government failure and a worsening of the misallocation of resources.
Con: The government must now deal with excess demand
Cons/Evaluation
The government must now deal with excess demand. This is because at a price of 0, demand of 01 is much larger than supply of Q*. In a free market, the price would increase to ration scarce resources but with state provision there can be no price rationing. The government must therefore use non-market based approaches such as treating patients based on severity of condition to deal with the excess they have created. This is highly normative and can lead to inefficient decisions being made as treatment is purely based on somebody’s opinion. Perhaps a lottery draw is done or the government succumbs and long waiting lists result. Either way this over-consumption is a major issues putting large strain on public services and on those who work in these sectors, with workers potentially leaving the industry or working elsewhere in the world. This is the problem when a price of 0 is charged. Supplying more to meet the demand would be too costly and extra quantity is not socially desired; there would simply be government failure.
Con: Knowing the right level for the state to provide is very difficult
Cons/Evaluation
Knowing the right level for the state to provide is very difficult. This is because assuming the state to have full information regarding true private and external benefits in consumption is unrealistic. Governments also suffer from a lack of information resulting in perhaps not enough resources being allocated to this market or too much quantity being produced. If quantity is too small, perhaps because the government cannot afford to provide at the socially optimum level, excess demand becomes a much greater problem and the existing market failure will remain to some extent. If too much is provided, the costs of those extra units would outweigh the benefits risking government failure.
Con: State run organisations tend to be highly inefficient
Cons/Evaluation
State run organisations tend to be highly inefficient. This is because they lack the same profit motive as private firms and are thus more likely to be complacent and wasteful in production. As a consequence, tax payers may not be getting the best value from their payments with a large opportunity cost of where this money could have been used better instead. Furthermore, wasteful and higher cost production will need greater funding going forward burdening future tax payers.
Con: Is there a role for the private sector?
Cons/Evaluation
Is there a role for the private sector? Given the problem of excess demand, an argument can be made for mix and match private and public provision, where those who can afford private provision without the waiting times and non personable time targets can pay for treatment or schooling. This would reduce some of the burden on state schools and hospitals freeing up more resources to be used on those who are in need of them. This argument gains weight for areas of healthcare which do not classify as merit goods such as plastic surgery and dental implants.
