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What is a public good?
A good that is both non-rivalrous and non-excludable
What is a non-excludable good?
A good where people cannot be stopped from consuming it even if they have not paid for it
What is a non-rivalry good?
A good where one person benefitting from it does not stop other benefitting from it
What are private goods?
Goods which are excludable and rival in consumption
What is a quasi-public good with an example?
A public good which takes on some of the characteristics of a private good, such as roads
How has technological change lead to television broadcasting becoming a private good?
Invention of digital technology meant that channels can be encrypted to ensure that people must pay for the channels they want
What is the free rider problem?
This occurs when people can benefit from a good/service without paying anything towards it or paying a contribution lower than their overall benefit
Why are public goods under-provided?
Due to the free rider problem, meaning firms do not make a profit from providing the good since consumers do not see a reason to pay for the product if they receive the benefit without paying for it.
Why does the price mechanism not work if there is a free ride problem?
Consumer won't choose to pay for the public good which they can get for free, therefore prices can't be used to signal if the market is in high demand
What is an example of the free rider problem?
Recycling → there is an incentive to free-rider on efforts of other people to recycle and make less effort yourself
What are solutions to the free rider problem?
- Tax and government provision (treat the many beneficiaries as one consumer and then divide the cost equally.)
- Appealing to people's altruism
- Privatisation of public goods
- Legislations (such as quotas)
What is the tragedy of the commons?
This refers to how individuals prioritise personal gain over the well-being of society. When no one owns a resource, it may get over-used i.e. deforestation
What does it mean for a resource to be held in common?
No one owns the resource, but everyone can access it
What is an example of the tragedy of the commons happening?
No one owns the air, but everyone can use it. This unlimited use leads to negative externality of air pollution, which is a market failure
The absence of what may lead to the tragedy of the commons?
The absence of intellectual property right (IPR)
How might the tragedy of the commons be linked to environmental market failure?
Lack of constraints on the use of natural resources will mean scarcity of resources increases as demand outstrips supply, so resources are used up. If resources become used up then the whole of society suffers → environmental market failure occurs now as the market has failed to allocate scarce resources effectively to meet the needs of society
