State provision to fix market failure

Define state provision

The direct provision of goods and services by the government free to consume

Where will state provision be used

To provide public goods - firms will not supply due to the free rider problem

To provide merit goods - to prevent under consumption of these merit goods

Explain how state provision works

Government considers social benefits of allocating resources at Q star.

So they provide the good for free at the point of consumption

This solves inequity by granting universal access

Also solves missing market issues with the free rider problem

So we are at Q star which is the social equilibrium and allocatively efficient

Issues with state provision

As state provision means the good is free the market cannot ration this good to consumers resulting in a large excess demand

(In healthcare they prioritise serious cases to get round this however this is far from a solution as it relies on normative opinions on who needs the attention)

Huge opportunity cost providing a good for free

Could result in a worse quality good or service as there is little incentive to improve it as it’s free - no incentive to keep costs down either resulting in x-inefficiency

The government may suffer from imperfect information and provide too much or not enough of a good