2.9 Market Failure (public goods)

Public goods definition

Collective consumption goods that have two characteristics of being non-rivalrous or non-excludable

Non-rivalrous

The consumption by one person does not reduce the consumption of another

Rivalrous

If the good is consumed by one person = cannot be consumed by another (reduce availability)

Non-excludable (definition and example)

Anyone is free to use it and can't be excluded

- Military defence, streetlights etc

Excludable

There is a price for the good so people who cannot pay are excludable

- Most goods are private goods

Nature of the free market

Public goods are underprovided because firms are not being paid for them = the government will have to provide them

The free rider problem

People are able to use the good for free then the good will be under-provided by the market because firms are not being paid

- once the public good is produced = impossible to stop people from benefiting from it (non-excludable) even if it's not paid = free ride on the back of consumption

What will this cause and why

Market failure -> Firms have the incentive to produce excludable goods because they can change the price for them

- No incentive for a profit-maximising firm to produce a good if they cannot sell it

= causes market failure as firms fail to produce these goods and fail to allocate to the public

What can the government do

1. Direct government provision

2. Government funding of private sector provision

Direct government provision

- The government decides there is a need and provides the public goods

Direct government provision (ad and dis)

Advantage:

- If left to the free market = these goods would not be produced as there is no price attached

- The government determines how important these goods are and how much money to allocate to their production

- Public goods = the gov does not charge individuals money to use them, so they benefit everyone

Disadvantage:

- Opportunity cost: The money could be spent elsewhere (the next best choice forgone)

- The market determines allocative efficiency because consumers purchase what they want and firms respond

Governmnet funding of private sector provision

- The government pays a private firm to produce the public good

Gov funding of private sector (ad and dis)

Ad:

- The government does not have to run the business day-to-day

- The private sector tends to be mor efficient

Dis:

- The government still pays for it

- The government has to decide how much money to allocate and how much to provide

The private firm may put profit ahead of quality

Common access resource (def and example)

Rivalrous but non-excludable: Consumption becomes less available but anyone can access them

-eg. river, forests, catching fish in the ocean

- Free rider problem applies = over used and becomes depleted -> non-sustainable

Example of commonc access resources

- In england, towns and villages have common ground for everyone to use in Wimbledon Common but no one raises animals there as the overuse of land in the past caused the area to be unusable

Common access resources and market failure (possible diagram)

- Common access resources can easily be overused because they have no price (non-excludable)

- When they are overused they result in disruptions to the climate and/or ecosystems they are integral to (negative externality diagram)

Examples:

- Overgazing land makes it unusable in the future

Overfishing in the sea makes the population of fish unable to sustain itself

Over-polluting the atmosphere deteriorates the air quality

How does the absence of price mechanism lead to market failure in common acc

- Signalling nad incentive function price leads to rationing of scarce resources

- The price mechanism allocates resources by determining the rpice in the market which makes products more or less expensive

How will a lack of price mechanism lead to an overuse of resources

- No way to exclude the overuse and production and consumption of a good

How does this create external costs

- Environmental cost

- Damage to ecosyste,

Government intervention in common access resources (why and types)

- Without government intervention, there will be an overuse of common access resources leading to unsustainable use and degradation of the resource

1. Assigning property rights: Once there is ownership = payment for using a resource

2. Government regulations:

Assigning property rights

Advantage:

- Resources have value and it is excludable

-The owners will use their resources in a sustainable way to guarantee its future use

Disadvantage:

-Society wants access to certain resources and doesn't believe they should be owned

- Some problems = air pollution, cannot be solved ownership

Government regulations:

The government can implement laws to protect resources. These can include making forests national parks, fishing can be made illegal or strictly monitored

Ad

- Fishing regulations and quotes stop over-fishing

Dis

- Regulations increase production cost