Public Goods

Question 1

Public goods

Answer 1

Goods that are consumed collectively which are non-rejectable, non-excludable, non-rivalry

Question 2

Non-excludibility

Answer 2

• when individuals cannot be excluded from using the good even if they haven’t paid for it

Question 3

Non-rivalry

Answer 3

• when the consumption of the one person does not affect the consumption of another person

Question 4

Non-rejectable

Answer 4

• goods cannot be rejected by people as it is collectively supplied

Question 5

Why does the Free Rider Problem occur?

Answer 5

• due to non-excludability, there is no incentive to pay for the good as they are able to consume it for free
• as a result private sector firms will never supply these goods as they don’t want to provide the good for free
• this leads to their being a missing market and complete market failure

Question 6

How can the government intervene to solve market failure?

Answer 6

The government can attempt to make things excludable
- however even if the government have imposed regulation, they cannot ban individuals

The government may pay a private firm to buy the good
- depends on the actual quality
- government may have to increase taxes which makes it worse

Question 7

Private goods

Answer 7

Goods that are consumed collectively which are excludable, rivalrous, and rejectable

Question 8

Rivalrous

Answer 8

When the consumption of one person affects the consumption of another person
- there is a scarcity of resources

Question 9

Excludable

Answer 9

When individuals can be excluded from using the good even if they are paying for the good

Question 10

Rejectable

Answer 10

Consumers can reject the good

Question 11

Advantages of the provision of public goods by the government

Answer 11

1. Free Rider problem causes there to be a missing market
- there’s going to be complete market failure as don’t want to sell the good for free
- up to the government to provide public goods as they are welfare maximizes

2. Good for macro economy if government invests in infrastructure
- increases geographical mobility
- provides jobs so derived demand for labor increases
- business confidence may increase so Investments increase

3. Economies of scale
- a fall in long run average costs as a result of growth
- the bigger the order the cheaper is as there would be bulk buying discounts for the government

4. Reduces income inequality
- narrows the gap between the rich and poor
- lower income households can now also afford the good

Question 12

Evaluation of the provision of public goods by the government

Answer 12

1. Costly
- massive opportunity cost as large projects are very expensive, bad as funds are limited

2. Implement tax
- we have to implement a tax to fund spending
- may increase regressive taxes which takes a larger proportion of income for lower income households which increases income inequality

3. Low efficiency
- the government are welfare maximizes and so are not motivated by profit so productivity is low and so quality may not be that good

4. Depends on how the government is funding it
- if fund using public private sector partnerships it is better than doing it on their own
- much more efficient and faster completion time as private firms are incentivized by profit

5. Can lead to government failure
- as the government is providing public goods that aren’t impacted by the price mechanism this could lead to excess demand and supply

6. Technology improvements
- have made some good excludable as can cause people to pay for the good
- gov tax revenue increases can spend more on welfare