A2 Economics Notes

Public goods are considered a market failure because they suffer from the free-rider problem. Due to the non-excludability and non-rivalry nature of public goods, individuals can benefit from them without contributing financially. This leads to underinvestment in the provision of public goods by the private sector, as there is no incentive for individuals to pay for something they can obtain for free. Without government intervention or collective action, public goods would be under-supplied in the market, resulting in an inefficient allocation of resources and a failure to maximize societal welfare. 

Non-excludability 

• • consumption or use of the good by one individual does not diminish its availability or utility for others.

  • An example of this is national defense: if a country invests in military protection, all citizens within that country benefit from the defense without decreasing the level of security available to others. 

  • free rider problem arises from non-excludability  

Non-rivalry 

• consumption or use of the good by one individual does not diminish its availability or utility for others. 

• An example of this is national defense: if a country invests in military protection, all citizens within that country benefit from the defense without decreasing the level of security available to others. 

• Quasi-public goods can be considered to be ‘impure’ public goods 

• They exhibit partial excludability and partial rivalry in consumption. 

• Partial excludability: certain individuals excluded from accessing or using the goods. Some level of control or restriction can be exerted over the use or access of quasi-public goods, typically through membership, subscriptions, or fees. 

• Partial rivalry: the consumption or use of the good by one individual can diminish its availability or utility to others, but only to a limited extent. The rivalry is not as strong as in the case of private goods, where consumption by one person directly reduces the availability or utility of the good for others. 

• Examples of quasi-public goods include toll roads, cable television, private parks, and club memberships. These goods are partially excludable because access can be restricted based on payment or membership, but their consumption by one person does not completely exclude others from benefiting, although there may be limitations on the number of people who can enjoy the good simultaneously. 

• Government must step in to ensure that public goods are produced at socially desirable levels 

• Public goods are directly provided by the government, are financed out of tax revenues and are made available to the public free of charge (or nearly free of charge). 

Advantages of government direct provision

• • Economies of scale: Government can leverage their resources and infrastructure to efficiently produce and distribute public goods to a large number of individuals over a broad base. governments can achieve cost savings and ensure widespread access to public goods.

  • Overcome free rider problem: Through taxation and centralized decision-making, governments can overcome the free-rider problem and ensure the provision of public goods that benefit society as a whole.

  • Equity & distribution: Public goods are typically available to all individuals regardless of their ability to pay, ensuring that even those with limited financial means can access essential services or benefits. This helps reduce disparities and promote social welfare by ensuring that everyone has a basic level of access to public goods, such as education, healthcare, or infrastructure.

  • Externalities: Public goods can generate positive externalities, benefiting individuals or communities beyond those directly consuming the good. For example, investments in education can lead to a more knowledgeable and skilled workforce, benefitting the entire economy. By providing public goods, the government can address such positive externalities and promote overall societal well-being.

Drawbacks of government provision of public goods

• Government provision of public goods requires making choices about which goods to provide and in what quantities. Limited government funds necessitate trade-offs, as producing one public good means sacrificing other goods and services. 

• Economic criteria are used to determine which public goods will provide the greatest social benefits for the allocated funds. Calculating the expected benefits of public goods is more challenging than with private goods, as there is no market price to indicate their value. 

• Misallocation of resources: Government provision of public goods relies on the allocation of public funds, which may not always align with the preferences or needs of individuals within society. The government's decision-making process may not accurately reflect the diverse demands and priorities of the population, leading to the misallocation of resources. 

• Lack of flexibility and responsiveness: Government agencies may face challenges in adapting to changing circumstances or responding to emerging needs in a timely manner. The bureaucratic nature of government can hinder quick decision-making and hinder the ability to efficiently allocate resources and adapt to evolving societal demands. 

• Political influence and corruption: The provision of public goods can be influenced by political considerations, potentially leading to biased resource allocation or favoritism. Corruption and rent-seeking behavior may undermine the effectiveness and fairness of government provision, compromising the intended benefits of public goods.