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Revision on Economics of Public Goods


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In this revision presentation we cover key examples of pure and quasi public goods and consider the arguments for and against an increase in government spending on public goods.

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Revision on Economics of Public Goods

  1. 1. Public Goods: Key Evaluation Points A Level Microeconomics (2019)
  2. 2. KEY ROLES FOR THE STATE IN A MIXED ECONOMY Merit Goods Welfare Services Public Goods Regulation NATURE OF ECONOMICS
  3. 3. The defining characteristic of a public good is that, if it is available to one person, it can be available to everyone at no additional cost. Once the good is available at all, the marginal cost of making it available to additional people is zero. A good is non-rival if its use by one person does not reduce its availability to others, so it can be made available to another person without cost.
  4. 4. PUBLIC GOODS Sanitation infrastructure Flood defence projects Crime control for a community Reduced risk of disease from vaccinations Freely available knowledge e.g. online learning Public service broadcasting services Irrigation systems for a community National parks / natural environment MARKET FAILURE
  5. 5. QUASI-PUBLIC GOODS Crowded beaches Toll roads and bridges Free Wi-Fi Busy urban parks MARKET FAILURE Quasi public goods are: 1. Semi-non-rival: up to a point, more consumers using a park or road do not reduce the space available for others. But beaches can become crowded as do parks/leisure facilities. Open-access Wi-Fi networks become congested slowing down the speed for all users 2. Semi-non-excludable: it is possible but difficult or costly to exclude non-paying consumers. E.g. fencing a park or beach and charging an entrance fee; or toll booths
  6. 6. PUBLIC GOODS AND TECHNOLOGICAL CHANGE Encryption devices Smart Electronic Road Pricing Open Source Software Live Streaming of Events MARKET FAILURE
  7. 7. Why are public goods important? Important relationship between investment in public goods and long-term economic growth and development Rule of law and protection of property rights – important for supporting innovation e.g. the ability to commercialize research Technology needs public goods - e.g. cars needs roads, safety systems. Electricity needs industry standards, smart phones need property rights on the spectrum State can be an important funder of ground-breaking research (GPS, SIRI, touch screen display, internet – were all publicly funded) Public good nature of new infrastructure – impacting on long run aggregate supply and competitiveness Public goods are crucial to social welfare – many public goods have no market price and are not subject to the profit motive
  8. 8. All sectors of the economy need public goods: Manufacturing industry needs Power, water treatment systems Trust in banking systems Environmental laws Agreed and enforced industry standards Corporate law Day care centres A literate labour force Physical connectivity
  9. 9. Building the case for an increase in government spending on public goods Economies of scale – more efficient to provide at state level leading to a lower long run cost per user Access and affordability – absence of profit motive makes public goods affordable – important for equity 1st order case for state provision if the market is missing – government funding to overcome a market failure Public goods drive long run economic growth and improve basic development outcomes (fiscal supply-side policy) Public goods can lead to higher private investment / regeneration of economically-deprived areas Low government bond yields – an opportune moment to increase state investment
  10. 10. Risks and drawbacks from increased government spending on public goods Absence of profit motive may lead to X- inefficiency and diseconomies of scale – which reduces the value per £/$ of extra spending In countries with weak institutions, higher government spending also linked with corruption / wasteful spending on “vanity projects” In some cases, might be more efficient for the government to fund but the private sector to provide certain “public goods” Market incentives might be better for promoting innovation
  11. 11. Public Goods: Key Evaluation Points A Level Microeconomics (2019)