State Provision content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Intro and Analysis of State Provision Pros and Cons of State Provision

1. State Provision
Lower 6th Micro
Government Intervention

2. Intro and
Analysis of
State Provision
Regulation
Mr O’Grady

3. State Provision
Definition: When a government intervenes in the market in order to supply a good
or a service
AKA Direct Provision or Public Provision
Done to provide public goods or other merit goods which would not be supplied sufficiently
in a free market to maximise welfare
Correcting the under-provision of public goods:
In a free market, no units are produced, QFM = 0
(MPB is never equal to MPC), but there is a positive
socially optimal quantity at QSO (MSB = MSC)
State provision ensures that the socially optimal
quantity is provided
The cost to society of producing this output is paid
for by taxes prior to producing the good
As it is not possible to make consumers pay for the good at
the point of consumption
Total welfare improves by raising quantity (green
triangle)
Price
Quantity
D = MPB
S = MPC
= MSC
MSB
QSO
PSO
S State Provision

4. Pros and Cons of
State Provision
Regulation
Mr O’Grady

5. Pros and Cons of State Provision
Pros:
Direct Control: Government directly controls the supply of goods and services – it can decide
exactly how many hospital beds is needed, how many soldiers to employ
Can easily achieve the socially optimal level of output and maximise welfare
Dynamic: Provision can be readily changed as society’s needs and wants develop over time
Cons:
Opportunity Cost: High cost of provision, could be spent elsewhere
X-inefficiency: State employees have limited incentive to minimise costs compared to private
employees.
Bureaucracy, wastage and inefficient production methods can make the good more costly to produce than
it needs to be
Misallocation: Since there is no price mechanism to guide resource allocation, the wrong mix
of goods may be produced – e.g. too many soldiers, not enough hospital beds to provide a
socially optimum output
This is heightened by the subjective nature of determining the value of the benefits of a public or merit
good to society