government intervention

State provision of public goods

Public goods are non-excludable and non-rival

◻ Non-rival:

consumption of a good or service by one person does

not restrict consumption by other people

◻ Non-excludable:

the benefits from a good or service cannot be confined

solely to those that paid for it

State provision of public goods

It is difficult for private businesses to make a profit

from supplying a public good due to them being

non-excludable

This means the free market is likely to not provide pure

public goods (there is a missing market)

Quasi-public goods may also not be provided, or may

be under-provided

◻ To ensure the ‘correct’ level of resources are

allocated towards the good, the government can

provide the good or service directly

Examples of public goods

Street lighting – public good which is directly

provided by local councils in their region

◻ Defence & Police – public goods that the

government pays for and directly runs – i.e. army,

navy, air force and police force

◻ Roads – quasi public good which the government provides

What are the advantages of state provision of public goods

Government can provide the exact level deemed

optimal by society

◻ Government provision means they can ensure all

people have access – i.e. both poor and rich have equal access

What are the disadvantages

Government provision may be inefficient

Private firms have an incentive to cut costs to a

minimum (due to profit maximising objective)

Government run organisations do not have the same

profit objective, so lack the incentive to cut costs

◻ As government is making decisions about the level

of supply, rather than the market, the ‘wrong’ mix

of goods and services may be produced

E.g. too many resources committed to defence and not enough towards hospital beds

What is Provision of information

If a market fails due to a lack of information or

asymmetric information, the government can try to

improve the outcome by providing information

itself

What are some examples?

Lack of information – e.g. tobacco, drugs, alcohol

Government conducts awareness campaigns (e.g. TV

adverts) to make people understand the harms more

clearly

Education – children are taught in school about

possible dangers of consuming these items

◻ Asymmetric information – e.g. financial products

Governments force banks to provide clear information

about products so that customers are less confused and

more able to make an informed choice

Legal duty to disclose information in certain

transactions e.g. insurance

What are advantages of provision of information

Over time this may lead to more significant

changes to society’s habits than simply raising the

price through taxes

E.g. Understanding the health dangers of smoking is

probably the largest factor in reducing incidence of

smoking over the last 50 years

◻ Allows greater individual liberty than banning or

controlling the good

What is regulation

Regulation by government (or an agency on behalf

of the government) involves setting rules and

requirements that must be followed by businesses

in particular industries, or across the economy

What are the different types of regulation

Government regulation could impose maximum

levels of pollution

E.g. MOT emissions, factory production

◻ Regulation could ban certain production completely

E.g. CFCs, drugs

◻ Regulation could involve minimum or maximum

pricing

◻ Regulation could require companies to provide

certain information

E.g. forcing airlines to disclose charges at the start of

the booking process rather than at the End

What are the advantages of regulation

Relatively easy to make consumers and producers

be aware and understand requirements

◻ Relatively cheap process to run and enforce

What are the disadvantages of regulation

Finding the right level of intervention can be

difficult

Regulation could be too tight or too lax

◻ If government does not back up regulation with

sanctions people may ignore it