Public Goods Flashcards
What characteristics should a public good have
Non-rivalrous, non-excludable, non-rejectable
What is non-rivalrous
Non-rivalrous refers to an additional user to the good does not diminish the availability of the goods from other users, therefore, allocative efficiency will be achieved when P=MC , price charge for the good has to be 0 for allocative efficiency to be achieved. MC=OP=0 .Since a rational producer is profit motivated they will be unwilling to supply for the good when the good is priced 0 , leading to a missing supply for the good.
What is non-excludable
Nonexcludable refers to that is impossible to exclude nonpayers from consuming the good once the good is produced. profit motivated producers will be unwilling to produce a good due to the lack of ability to change price. This would also lead to free rider problem as consumers want to continue enjoying the benefits from consuming the good of their own willing to pay therefore they will continue enjoying considering the good without paying. The demand for the good but also be concealed as government will not know how much the consumers demand for the good. Pass with free rider problem and demand concealed this would lead to allocative in efficiency. Absence of price signals will lead to a missing market where there is zero production of the good, since resources are not officially allocated to production of the good desired by society this leads to market failure, where a government has to intervene in the form of “full public provision” which leads to allocative supply which links to the last characteristics of non-rejectable.
What is non-rejectable
Non Rejectable refers to people are unable to reject or refuse the good once it supplied. And the goods are actually paid indirectly through Taxes. E.g. national defence.
Using examples ,Explain why market fails in the case of public goods
Market failure occurs when a price mechanism operating in the absence of government intervention fails to achieve allocative efficiency. Market usually feels when there is under production of the good as producers are on concern of the external benefits it brings to the third parties. For examples street light is a public good as it has characteristics of it being non-rivalrous, nonexcludable and non-rejectable. Street lights are non rivalrous as an additional person walking on the street will not diminish the amount of light available for others that are walking on the street. Therefore P=MC=OP. Locative efficiency is achieved when P= MC=0. Rational producers are profit motivated and they will be unwilling to supply for the good price is at zero this leads to a missing supply and government will have to intervene.
Street lights are not excusable as it is impossible to exclude nonpayers from using street light . This would lead to free rider problem as well as demand concealed. The producers will be unwilling to supply for the good as electability to charge prices which leads to allocative inefficiency. The absence of pi signal will lead to a “missing market” where there is 0 production of the good, and government will have to intervene in the form a full market provision which will lead to allocative supply which will bring us to the third characteristics of not reject-ability.
Explain why market fails in the case of goods that generates positive externalities
Good is that generate positive externality also leads to market failure.
Positive externalities Are the spill over benefits to 3rd parties that are not directly involved in producing or consuming the good and no payment made for the benefit gained.
Producers or consumers are not concern of the external benefit and only care about their private benefit and cost when producing or consuming the good, ties producers and consumers would consume or produce at Q1 where MPB=MPC, where producers/consumers welfare is maximised
There is a divergens between MPB and MSB due to MEB
The socially optimal level is at Q2 where MSB=MSC, where societies welfare is maximised and allocative efficiency is achieved
Since Q2 is more than Q1 this leads to underproduction/under consumption of the good
Therefore there is a dead weight loss which is the potential welfare gained if producers/consumers produce/consume at Q2 instead of Q1
Therefore since allocative efficiency is not achieved and there is market failure government would have to intervene to ensure that production level will increase to Q2 as socially optimal level efficiency is achieved, solving market failure.
Why is education not a public good But a good under-consumed
Education is not a public good because a public good chef characteristics of non-rivalrous nonexcludable and non-rejectable. Education is not a public good because it is rivalrous, excludable and rejectable. Nonretractable refers to a good that an additional user to the good does not diminish the availability of the good to other users. However, education is rivalrous S typically every school has a capacity to take in a fixed number of students, thus it will have to reject any additional students. Therefore education is rivalrous as when capacity is reached other students will not be able to be admitted into the school and thus unable to receive education from the school. Nonexcludable refers to a good that is impossible to exclude nonpayers from considering the good education is a suitable as when people do not pay for their monthly school fees will be kicked out from the school for not paying in the school can stop their students from receiving education if they do not pay. Leslie not rejectable refers to a good that individuals cannot reject or refuse wants to good has been produced. Education is rejectable as only in Singapore it is compulsory education where primary school is compulsory however education afterwards like university is optional and can be rejected. Thus education is rejectable. Since education is rivalrous, excludable and rejectable, it is not a public good.
Education is however a good that is underconsumed in society as individuals only consider their private benefit and private course they do not consider the external benefit it brings to 3rd parties . The third parties are people that are not involved directly in consumption or producing the good and without payment for benefit made. An example for third party and their benefits is that with education, people get to gain more knowledge and skills which means that there are more skilful population in Singapore, this would attract MNCs to set up operations in Singapore, employing more people with education, however third parties that have lower or no education can also be hired as cleaners, thereby earning income as well as more jobs are created. Does the third parties get to enjoy benefits from education which many consumers are unaware of which leads to a underconsumption of education. Without government intervention, individuals will consume at current market equilibrium where MPB= MPC where consumers welfare is maximised however the socially optimal level is at MSB= MSC where societies welfare is maximised and allocative efficiency is achieved however individuals are unaware of the MEB, that’s leading to under consumption of education and a dead weight loss. Therefore societies welfare is not maximised and the government need to intervene to increase consumption of education, to solve market failure.
