Public Goods

Question 1

When do governments get involved in markets

Answer 1

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

Question 2

Are normal market forces in our economy present when goods are free of charge

Answer 2

No

Question 3

Why can’t private markets allocate goods that have no price attached

Answer 3

Private market cannot ensure the good is produced and consumed in proper amounts
They cannot allocate the goods efficiently

Question 4

Why is government intervention needed for goods with no price attached

Answer 4

The raise economic well-being through efficient production and consumption of the good

Question 5

Examples of free (public) goods

Answer 5

Street lighting
Local playgrounds
Beaches

Question 6

If the government didn’t step in what would happen to these free goods

Answer 6

Wouldn’t be produced as it isn’t efficient or wouldn’t be produced in amounts to satisfy the needs of the public

Question 7

What does it mean when a good is excludable

Answer 7

A person can be prevented from using the good eg if they do not pay for it

Question 8

What does it mean when a good is rival

Answer 8

One person’s use of the good diminishes another person’s use of the good eg chocolate bars

Question 9

Are private goods excludable?

Are private goods rival?

Answer 9

Excludable
Rival
Eg clothes

Question 10

Are public goods excludable

Are public goods rival

Answer 10

Neither excludable or rival

Eg radio broadcast, public knowledge

Question 11

Are common resources rival

Are they excludable

Answer 11

Are rival
Are not excludable
Eg common grazing land

Question 12

Are club goods excludable

Are they rival

Answer 12

Are excludable but not rival

Eg gym memberships

Question 13

Key characteristic of public goods

Answer 13

If it’s available to one person, it’s available to everyone at no extra costs eg national defence
Non rival
Non excludable

Question 14

Examples of public goods provided by environment

Answer 14

Beaches

Sunsets

Question 15

What is a free rider

Answer 15

A person who doesn’t contribute towards provision of a public good but still receives benefits from the use of the good

Question 16

Why is the free rider problem an incentive for private markets not to provide public goods

Answer 16

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

Question 17

Why is there often underprovision of public goods

Answer 17

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

Question 18

How can the free rider problems be solved

Answer 18

The government can provide the good if the benefits to the public outweighs the costs

Question 19

How does the government pay for public goods

Answer 19

Tax revenue

Question 20

What is cost benefit analysis

Answer 20

The study that compares the costs and benefits to society of providing public goods

Question 21

How do decide if public goods are needed based on cost benefit analysis, why is this difficult ?

Answer 21

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

Question 22

What are examples of social costs and benefits

Answer 22

Value of time,
Value of life
Value of aesthetics