Public goods and complete market failure

Question 1

Define public goods

Answer 1

• non-rival
• non-excludable in consumption
• prevent mkt frm functioning, result in complete mkt failure (situation where mkt is unable to provide for it)

Question 2

Non-rivalry in consumption

Answer 2

• does not reduce qty available to another person
• e.g. streetlight doesn’t get dimmer when one is using it
• marginal cost of providing good to additional user =0
• opt resource allocation: P=MC, with zero MC – means that px has to be zero (according to principle)
• society pov: not desirable to charge consumers for gd
• no firm wants to supply, no revenue – complete mkt failure

Question 3

Non-excludable in consumption

Answer 3

• difficult to exclude non-payers frm enjoying gd
• free rider problem
• no one willing to pay for consumption of gd
• no profit-maximizing firm wants to produce gd

Question 4

Example of public gd

Answer 4

• defense, flood control
• building dam protects valley
• impossible and undesirable to charge mkt px
• satisfies collective wants, indivisible (cannot be sold or produced in small units) – high cost, unattractive for profit-maximising firms

Question 5

Public/gov provision

Answer 5

• taxpayers’ money
• fund provision, spread cost over large no. of ppl who would not be prepared to pay individually
• might not achieve socially opt lvl due to imperfect knowledge
• produce more than S.O. lvl –> wastage of resources (inefficient allocation)
• bureaucracy and red tape – slow down decision-making, waste resources
• 2013, SG civil service topped 12 Asian economies (PERC report) – gov failure less likely in SG

Question 6

Contracting out to private sector

Answer 6

• provide financing (tax revenues) for pdtn of gd
• allow private producer run it
• e.g. contract construction firms to build highways

Question 7

Contracting private sector evaluation (+ve)

Answer 7

• competitive tendering – competition between firms to provide svc, lowest cost picked
• access to broader range of skills and tech
• btr quality and lower cost than if gov provided it

Question 8

Contracting private sector evaluation (-ve)

Answer 8

• firms only engage if profits is earned (controversial)
• charge high px for svc
• risk of qlty being reduced/compromised due to competitive tendering
• corrupt gov might choose private firm to help increase profits frm taxpayer money
• imperfect knowledge