AS Economics - Public Goods


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This updated revision presentation provides an introduction to the concept of public goods.

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AS Economics - Public Goods

  1. 1. Public Goodsand MarketFailureAS Economics2013
  2. 2. Will the market supply?• Businesses in the private sector may not provide public goods – leading to market failure• It is important to distinguish between private and public goods• And to understand why the market may not offer some public goods!• In which case there is an argument for collective provision by the government
  3. 3. Characteristics of Private Goods• What are private goods?• Private goods are excludable – Consumers of private goods can be excluded from consuming the product if they are not willing or able to pay for it – For example - a ticket to the theatre or a sports event or a meal in a restaurant – If you don’t pay – you don’t consume and benefit from the good or service!
  4. 4. Excludability: Charging the User
  5. 5. Private Goods• Private goods are rival – One persons consumption reduces the amount left for others to consume – Scarce resources are used up in producing and supplying the good or service – There is an opportunity cost – The marginal cost of supply is positive – Therefore we can justify charging a price• Private goods are rejectable – Private goods can be rejected
  6. 6. Rivalry in consumption An “All you can eat buffet” – why is this a private good?
  7. 7. Public and Private Goods at the Races!Consider the nature of excludability andrivalry of consumption at a racecourse
  8. 8. Common grazing land / fisheries – apublic good? Sustainable?Common access (free for all)natural resources often suffer whatis known as the Tragedy of theCommons – what does this mean?
  9. 9. What are Public Goods?• Pure public goods have three main characteristics:• Non-excludability: – The benefits of public goods cannot be confined to those who have paid for it – Non-payers can enjoy the benefits of consumption at no financial cost to them – These people are known as “free-riders”
  10. 10. Non-Excludability
  11. 11. Non-Rival Consumption
  12. 12. Flood defence – are there aspects ofa public good with this?
  13. 13. The Free Rider Problem• Markets work best when goods and services are private – they are rival and excludable• Consumers have an incentive to not reveal their willingness and ability to pay for public goods if they believe that they will be expected or required to contribute to financing the public good• Good examples to use include TV Licence dodgers and people who choose to evade Council Tax but who still receive local authority services
  14. 14. Spot the free rider! If we can make the good excludable in some way, the free market could provide the good, as now people have an incentive to reveal their true willingness to pay, since they can no longer free ride
  15. 15. A tandem example of free-riding
  16. 16. Public Goods• Non-rivalry in consumption: – Consumption of a public good by one person does not reduce the availability of a good to others – In other words, if the good is provided for one person it must be provided for others – The amount of the good I enjoy has no affect on the amount you enjoy• Non-rejectable nature of public goods – If a public good is provided, in most cases we cannot avoid it e.g. Nuclear defence for a nation
  17. 17. Pure Public Goods• Pure public goods are also known as collective consumption goods • National Defence Systems • Sewage and Waste Disposal Systems • Lighthouse Protection • National Rail Safety Systems • A well functioning legal system • Good air quality • Street Lighting • Firework Displays • Flood defence systems
  18. 18. Semi-Public (Quasi) Public Goods• Quasi public goods are products / services that are public in nature, but do not exhibit fully the features of non-excludability and non-rivalry• They may become non-rival e.g. at peak times when congestion occurs
  19. 19. Semi-Public (Quasi) Public Goods – There is an element of excludability or rivalry in consumption – Examples might include: • Motorways and major roads • Parks and other public attractions • Refuse collection and disposal? • Terrestrial television (public service broadcasting) • Police Force protection • Museums such as the British Museum • Radio frequencies
  20. 20. Beaches – Rivalry and Excludability
  21. 21. Peak Times
  22. 22. Making a quasi public goodexcludable – road and bridge tolls
  23. 23. Online courses – information as apublic good – but what about exams? What are the motivations for putting courses online for free? Is the market making a private good a public good?
  24. 24. Paying for public goods• Markets cannot provide the incentives needed to supply essential services such as policing and defence causing allocative inefficiency• Hence public goods are provided collectively by government and financed through general taxation or other forms of charge e.g. The BBC licence fee
  25. 25. Can the private sector provide publicgoods?• Yes• Groups of neighbours pay voluntarily pay for local security patrols at night• Because they value the public good nature of the service highly• Voluntary donations to organisations providing public services – examples of altruism• Is altruism a reversal of self interest?
  26. 26. Why does the state provide public goods?1. On grounds of equity – so that people on all levels of income can have access to them – Providing on grounds of need rather than ability to pay2. On grounds of efficiency – Easier to provide them collectively – Economies of scale from providing to all?3. To overcome the free-rider problem and the failure of the market to provide sufficient public goods – One basic purpose of government is to provide goods that market forces will not4. Even thought the state may finance these goods – others can provide them at the point of need
  27. 27. Valuation of Public Goods• How much are we willing / able to pay for public goods to be provided?• Can be hard to construct a social demand curve – users may exaggerate the benefits• The democratic process is imperfect• Government often influenced by lobbying• Who actually benefits? Who pays?• Should people who benefit directly make a contribution?
  28. 28. What if public goods are provided forfree to users?• Demand will expand along the demand curve• Some will overstate their demand for a service and over-come it – putting pressure on public finances and creating excess demand• Putting a price on a public good means that users make some contribution towards cost• But the price should reflect the marginal benefit that people get from the service• BBC licence fee - too high or too low?
  29. 29. Public Goods and the Prisoner’s Dilemma– using a bit of Game Theory
  30. 30. For more help, follow tutor2u on Twitter tutor2u tutor2u_econ
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