Public Goods

Question 1

What are private goods?

Answer 1

Private goods and goods which are excludable by the producers (possible to charge a price, and thereby exclude individuals from using the good) and non-rivalrous in consumption (use by one does makes it less available for use by others)

Question 2

What are public goods?

Answer 2

Public goods and goods which are non-excludable by the producers (not possible to charge a price, and thereby exclude individuals from using the good) and non-rivalrous in consumption (use by one does not make it less available for use by others)

Question 3

Why are public goods a type of market failure?

Answer 3

Public goods are a type of market failure because of the free rider problem

Question 4

What is the free rider problem?

Answer 4

Free rider problem occurs when people use a good without paying for it. This happens for public goods because of their non-excludable nature. Therefore, firms have no incentive to produce and supply public goods, thereby leading to an underallocation of resources towards the production of the good.

Question 5

What are quasi-public goods?

Answer 5

(i) non rivalrous
(ii) excludable

• Like museums and toll roads

Question 6

How is the market failure of public goods solved?

Answer 6

Through direct government provision

Question 7

What are the difficulties faced by government for the direct provision of public goods?

Answer 7

1. Limited funds (opportunity costs)
2. While market price reveals value of private goods, difficult to evaluate value of public goods (and thereby know what to provide)
   - can be countered through surveys and votes and subsequent cost-benefit analysis