State provision and market failure

Question 1

What is state provision ?

Answer 1

When the GOVT provides goods and services free at the point of consumption

Question 2

Why does the state do this ?

Answer 2

State provision solves the issue of missing markets

Question 3

Explain the state provision and market failure diagram ?

Answer 3

The GOVT considers the full social costs and benefits of the good / market so they allocate resources out to Q* (right)

As it is free there is no price on axis

At Q* it creates for excess demand as the supply curve goes over Q line

But it creates allocative efficiency and welfare maximisation

Question 4

What are some counterpoints for using state provision to solve market failure ?

Answer 4

Excess demand created when price is 0 - longer wait lines - may need to ration based on severity of need

Cost / may need to cut in other areas to fund

Imperfect info - the GOVT doesn’t always know the correct supply of the good so it may not be at Q*

Inefficiency of GOVT organisations as there is no profit incentive to cuts costs