public goods Flashcards
what is an economic good
An economic good is a good or service that has a benefit (utility) to society.
Also, economic goods have a degree of scarcity and therefore an opportunity cost.
E.g. If used for one thing, it cannot be used for something else.
What is a Private Good?
Excludable:
Individuals can be prevented from using/accessing a good through the price mechanism.
Rivalrous:
Consumption by one individual reduces the ability of others to consume it.
What is a Public Good?
Non-Excludable:
Individuals cannot be prevented from using a good through the price mechanism.
Non-Rivalrous:
Consumption by one individual doesn’t reduce availability for others. ‘Can’t be used up’
Sewage, Lighting and Army are all examples of Public Goods/
The Free-Rider Problem
Someone who want others to pay for a public good but plans to use the good themselves without paying.
E.g. Streetlights, Drainage systems, Public Metro systems etc.
Free-Riders and Market Failure
Firms cannot exclude and therefore will lose revenue from free riders.
Therefore they will withdraw supply from the market, and the goods will be underproduced.
Eventually leads to Market Failure
Solving Public Goods & Market Failure
Government can take over production and provide public goods.
‘State Provisioning’
Evaluation:
Opportunity cost- on government spending as there is an impact of the budget
Incorrect Resource Allocation
-unaware of the correct amount for society, difficult for government to calculate the socially optimum amount
involves taxation so that will harm low income people
What is a Quasi-Public Good
Quasi Public goods have elements of public and private goods.
They might be non-excludable but rivalrous or partially excludable and partially rivalrous.
e.g. Public Access Wifi - Can become overcrowded and very slow
-public transport
-firework
-motorways
Tragedy of the Commons
Tragedy of the Commons refers to when good/service is non-excludable but is rivalrous.
For example:
Fishing
Wood/Forestry
example-
The Tragedy of the Commons can lead to conflict as resources become contested.
River Nile & Ethiopia’s Dam
Egypt, Sudan, South Sudan & Ethiopia have access to River Nile, however the actions of one nation can prevent others from using it.
what does the consumer need to have good information
The Buyer and Seller would both have full knowledge of the:
Price
Benefits
Costs
If both parties have all the required info, there is Symmetric information.
what is an information gap
The buyer or seller does not have access to the information to make a ‘good’ decision.
Poor decisions lead to consumer demand or producer supply of G/S to be too high or low.
Thus price and quantity are not at the social optimum position.
Merit goods under consumed, demerit goods over consumed
what are causes of information failure
Addiction/Habits
Asymmetry
Poor knowledge of long-term impacts
Framing
how does information gap impact the mpc diagram
market demand is lower because they do not have good information
individuals may have imperfect infomration about their own private benefits, if they have better info on the benefits for themselves of consuming a good or service, the marginal private benefit curve shifts outwards leading to a higher equilibrium quantity
If people were aware of the PB then demand would increase.
what is a moral hazard
When a party with superior information alters their behaviour to benefit themselves while imposing costs on others.
E.g.
Banks & Bailouts
Dentists/Doctors & Treatment
Insurance Market
In insurance markets, change in behaviour would lead to insurers raising premiums for everyone
explain the link between moral hazards and the insurance market
Firms would raise prices knowing that they will be taking on riskier individuals
examples of other information gaps
Framing Issues
Fruit Juice portrayed as healthy (1/5 a day) while hiding excess sugar or calling sugar ‘glucose’. Leads to a false perception.
Regulatory Capture
Regulators spend time with firm and receive information from firms. Leads to regulators acting in a sympathetic way.
