public/private goods

Question 1

Public goods

Answer 1

-not included in the free market but offer benefits to society
-non-excludable: by consuming the good, other people are not prevented from consuming the good aswell
-non-rivalrous: consumption of the good does not reduce availability for others

examples:
public parks
street lights

Question 2

Free rider problem

Answer 2

-People who do not pay for the good still receive the benefits
-Public goods underprovided by the public sector as firms do not earn profit
-no incentive for consumers to pay
-firms stop production

Question 3

Gov intervention

Answer 3

-Government raises taxes to pay for the provision of public goods- quantity not at the social optimum
-Have to estimate social benefit when deciding output

Question 4

Valuation

Answer 4

-difficult to measure the value obtained by consumers who purchase public goods.
-Consumers will under-­‐value the benefit gained from a public good to lower the price,
-producers will over-value the benefit gained from a public good to increase the price.
-The uncertainty over valuation makes it hard to establish a market price, which will deter firms from providing public goods.