A2.03.07: Government Provision of Public Goods

Question 1

What is direct government provision and why does this occur

Answer 1

Private sector producers are unwilling to supply public goods as its costly and extremely inefficient thus, governments intervene to ensure these public goods are provided

Question 2

What are the features of the public goods provided by the governments

Answer 2

• Financed by tax revenue
• Available for free or at very low prices

Question 3

What do the public goods chosen by governments have in common? Why did they choose those public goods and what can be the limitations of gathering data from those public goods?

Answer 3

• They create positive externalities
• However, as the goods have no demand curve, calculating social demand can only be attained through surveying public opinion
• That is notoriously inaccurate as it is government-decided thus, corruption can follow alongside those public goods

Question 4

What is contracting out

Answer 4

• Governments employ private firms to carry out the provision

Question 5

What are the benefits of contracting out

Answer 5

• Governments use competitive tendering involving private firms involving private firms competing with one another resulting in more efficient and lower cost firms being selected to purchase the public goods from
• Private firms are specialists thus, have access to better skilled workers, knowledge and equipment
• Private firms are more profit driven and therefore will be encouraged to be as productive as possible as well as invest in better technology thus, being more dynamically efficient

Question 6

What are the drawbacks of contracting out

Answer 6

• Governments can shift the blame for any issues with the public goods onto the contractors
• Governments can lose control
• Profit motive could result in cut corners and lower quality
• Monitoring costs can be very high