Public Goods Flashcards
When do governments get involved in markets
When there’s imperfect competition
When there’s a presence of external costs and benefits
When there’s imperfect market structure
When there’s existence of public goods
Are normal market forces in our economy present when goods are free of charge
No
Why can’t private markets allocate goods that have no price attached
Private market cannot ensure the good is produced and consumed in proper amounts
They cannot allocate the goods efficiently
Why is government intervention needed for goods with no price attached
The raise economic well-being through efficient production and consumption of the good
Examples of free (public) goods
Street lighting
Local playgrounds
Beaches
If the government didn’t step in what would happen to these free goods
Wouldn’t be produced as it isn’t efficient or wouldn’t be produced in amounts to satisfy the needs of the public
What does it mean when a good is excludable
A person can be prevented from using the good eg if they do not pay for it
What does it mean when a good is rival
One person’s use of the good diminishes another person’s use of the good eg chocolate bars
Are private goods excludable?
Are private goods rival?
Excludable
Rival
Eg clothes
Are public goods excludable
Are public goods rival
Neither excludable or rival
Eg radio broadcast, public knowledge
Are common resources rival
Are they excludable
Are rival
Are not excludable
Eg common grazing land
Are club goods excludable
Are they rival
Are excludable but not rival
Eg gym memberships
Key characteristic of public goods
If it’s available to one person, it’s available to everyone at no extra costs eg national defence
Non rival
Non excludable
Examples of public goods provided by environment
Beaches
Sunsets
What is a free rider
A person who doesn’t contribute towards provision of a public good but still receives benefits from the use of the good
Why is the free rider problem an incentive for private markets not to provide public goods
Because free riders will withhold from paying for the good in the hope that others will pay for it, however everyone thinks similarly in this way
Why is there often underprovision of public goods
Each person deliberately underestimates the benefit they will receive from the good in the hope that others will tell the truth and hence pay for that good, however each person has this same behaviour leading to lack of these goods
How can the free rider problems be solved
The government can provide the good if the benefits to the public outweighs the costs
How does the government pay for public goods
Tax revenue
What is cost benefit analysis
The study that compares the costs and benefits to society of providing public goods
How do decide if public goods are needed based on cost benefit analysis, why is this difficult ?
Total benefits of all those who us the good is compared to the total cost of providing the good
It’s difficult because unlike in the private market, the amount people want to supply and pay is unclear or biased, and so it is less of an exact science and more guess work
It’s the social costs and benefits that must be compared, not the private costs and benefits
What are examples of social costs and benefits
Value of time,
Value of life
Value of aesthetics
