5a mkt failure - public goods

gov microeconomic objectives

productive efficiency (all points on PPC)

• firms pd max o/p with a given amt of i/p

allocative efficiency (one point on PPC)

• current combi of gds & svcs allow society to attain greatest lvl of satisfaction

• P = MC

maximising societal welfare

• MSB = MSC

• scarce resources are allocated in an optimum way to fulfil crs’ wants

public goods

goods that has the characteristics of non-excludability & non-rivalry

• no csr willing to pay, as they are all waiting for someone to do so they can enjoy benefits w/o cost

• no pdr willing to supply this gd for free

1. non excludability

• impossible.costly to exclude non-payers from using the gd

  • free rider problem: anyone can enjoy benefits of gd w/o paying

• leads to non provision of gd

  • non profit-maximising firm wld supply

2. non-rivalry

• more ppl consume, benefit of good doesnt dec

  • P=MC=0

  • no firm wld be willing to supply this gd at P=0 (for free)

3. non-rejectability

• crs cannot refuse csption of gd after it has been pdced

gov intervention

1. direct provision of public gds

• provide all resources to pd public gd, using tax payers’ $

  • ensures that public gds are supplied at socially optimal o/p lvl

  • gds are affordable & accessible to all

2. fully fund private firms to pd public gds

• unsure that public gds are supplied at socially optimal o/p lvl, while bearing full COP

LIMITATION

• costly

  • may have to increase tax/borrow funds, incurs opp cost

  • may have neg implications on csption/investments in economy

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