U1 AOS 2 - Lesson 20 - Market Failure (Public Goods) Flashcards
Market Failure
When an unregulated market does not allocate resources efficiently or maximise living standards, resulting in either an under or over allocation of resources so living standards are not maximised
Public Goods
- Socially desirable;
- Non excludable - available for all; and
- Non-depletable/non-rivalrous - where one’s consumption does not prevent another from consuming
NB: VCAA will often use ‘non-rivalrous’ to try and confuse you!
How Public Goods Create Market Failure
Non-excludable → free rider problem, where individuals who do not pay still receive the benefits of the good/service → low profit making opportunity → underallocation of resources to producing public goods
Examples of Public Goods
- Street lights/footpaths
- National defence
- National parks
- Fireworks
- Broadcast radio/TV
Government Interventions to Public Goods
- Subsidies - payment/concession to a producer to increase production → decrease costs of production/increase profit → increased willingness and ability to produce → increased production → addresses under allocation of resources
- Direct provision - government provides the good/service themselves since they are motivated by improving national living standards rather than profit → increases allocation of resources
VCAA 2021
Question 10
Which one of the following goods is not likely to be considered a public good?
A. a fireworks display
B street lighting
C. healthcare services
D. free-to-air TV broadcasts
C - healthcare services has a capacity (eg. number of beds/doctors) so it is excludable
VCAA 2020
Question 3
Which one of the following best describes the characteristics of a public good?
A. excludable and rivalrous
B. excludable and non-rivalrous
C. non-excludable and rivalrous
D. non-excludable and non-rivalrous
D
Non-rivalrous means the same as non-excludable (ie. consumers are not competing for the same good/service)
True/False
Public goods cannot be provided by the private sector (eg. businesses)
False.
Governments can subsidise businesses to produce public goods
Producers do not produce enough public goods because
A. the cost of production is too high
B. public goods are free
C. public goods are non-depletable
D. public goods are non-excludable
D
Non-excludablity gives rise to the free rider problem
The free rider problem means that
A. no consumers will pay
B. consumers who do not pay still receive the benefits of the good
C. prices have to be increased to cover non-payers
D. producers have no method of collecting revenue
E. Both B and C
E
Sometimes, there will be prices for public goods. For example, some national parks have entrance fees - however, these are avoidable. Sometimes, collection costs are prohibitively expensive
Tony is a wheat farmer, and he uses rainfall and sunlight to help the wheat crops grow.
In this case,
A. both rainfall and sunlight are public goods
B. neither rainfall not sunlight are public goods
C. rainfall is a public good but sunlight is not a public good
D. rainfall is not a public good but sunlight is a public good
D - rainfall is technically depletable
