MICRO - LS18 - Public Goods

Question 1

Merit goods

Answer 1

Goods deemed more beneficial to consumers then they realise

Question 2

Non-rival vs rival

Answer 2

Consumption of a product doesn’t prevent another person from also consuming that product
E.g. radio show - one person watching it doesn’t stop another person from watching it
However the actual radio is a rival good

Question 3

Non-excludable vs excludable

Answer 3

When a good is provided it’s impossible to stop people from using it
e.g once a lighthouse is provided, ships at sea can’t stop using it
However if car manufacturer provides new car model, people can be excluded from it if they can’t afford a new one

Question 4

Free rider problem

Answer 4

• Type of market failure that occurs as everybody is able to benefit from public goods use
• They’re a problem as while not paying for a good they may continue to access/use it, so it’s likely to be under provided or not provided at all
• merit goods

Question 5

Social benefits

Answer 5

= private benefits + external benefits

Question 6

Social costs

Answer 6

= private costs + external costs

Question 7

Positive externality

Answer 7

Social benefit > private benefit
Since external benefits are present

Question 8

Negative externality

Answer 8

Social cost > private cost
Since external costs are present

Question 9

Social optimal level of output

Answer 9

Where all external benefits and external costs are accounted for

Question 10

If External benefits present

Answer 10

Underproduction/underconsumption in free market

Question 11

If external costs present..

Answer 11

Overproduction/Overconsumption in free market

Question 12

Draw negative production externality and examples

Answer 12

See notes
E.g. pollutions/emissions

Question 13

Draw positive consumption externality and examples

Answer 13

See notes
E.g. educations and gyms

Question 14

Negative production externality explanation

Answer 14

• If negative externalities, must add the external costs to the firm’s supply curve to find the marginal social cost curve (MSC).
• If the market fails to include these external costs, the private equilibrium output is Q1 and the price P1 where marginal private cost = marginal private benefit.
• The socially efficient output is Q2 with a higher price P2 - here the external costs have been considered.
• At price P2 and output Q2, we have not eliminated the pollution - but at least the market has recognised them and priced them into the price of the product.
• For economists, it is rarely the case that products generating external costs should have production levels of zero - we recognise that there are usually some benefits to these products being provided

Question 15

Private goods characteristics

Answer 15

• Rival
• Excludable
• Rejectable - can be rejected by the consumer if their needs/preferences or their budget changes

Question 16

Public ‘bads’

Answer 16

Non-excludable & non-rival but provide dissatisfaction to people who consume e.g. fly tipping & air pollution

Question 17

Possible solutions to the market failure of public goods

Answer 17

• government provision - collect through taxation
• government funding - could find private provision financed through tax or charges e.g. TV license
• voluntary/charitable donations
• communities may act altruistically

Question 18

Advantages & disadvantages of gov provision

Answer 18

• equity - everyone has access to public goods
• efficiency
• overcome free-rider problem
• public sector investment higher
• government corruption issues
• government funding of private sector provision is often costly & wasteful
• government may lack information to provide amount of public goods