T1: LS18 - Public Goods

Question 1

Public good definition

Answer 1

Public goods: goods which are produced by the public sector which are both non-excludable and non-rivalrous

Question 2

Non-rivalrous definition

Answer 2

Non-rivalrous: refers to a G&S where as one consumer uses it another is not prevented from using it due to its limited supply

Question 3

Non-excludable definition

Answer 3

Non-excludable: refers to a G&S where as one consumer uses it, it is impossible to prevent others from also benefitting it

Question 4

Free rider problem definition

Answer 4

Free rider problem: a type of market failure which occurs as several consumers use a G&S which only incurs costs on one consumer while others benefit and access it for free.
- occurs as one person pays for G&S and other benefit for free

Question 5

Why does the free rider problem cause a market failure

Answer 5

• can make G&S unprofitable for firms as there is not enough demand for their G&S yet people are benefitting from the supply without paying

Question 6

Why are public goods underprovided?

Answer 6

Public goods: non-excludable and non-rivalrous
- Unprofitable for firms to produce G&S which are non-excludable
- Unprofitable for them to produce G&S for free making it non-excludable
- Unprofitable for them to produce G&S where supply benefits all without limiting others
Therefore, only public sector produce

Question 7

How does the private sector exclude consumers?

Answer 7

• Prices are determined by price mechanism
• Excludes benefit to those who cannot afford to pay

Question 8

Why will the private sector produce goods which are rivalrous?

Answer 8

• Costs more to produce an unlimited supply or one which all consumers can access without preventing others from using it
• Limited supplies increase competition to buy G&S —> higher prices and profits

Question 9

What are Quasi-public goods

Answer 9

• G&S where some features and services are free and unlimited making the, non-excludable and non-rivalrous
  But some features need paid subscriptions or are restricted for some

Question 10

Why does public sector production lead to under provision of public goods

Answer 10

Public sector:
- Lack of funding from tax
- Opportunity costs to other areas of production
- No profit motive = lower productivity
- Less competition —> less efficiency