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Public Goods
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MARKET FAILURE (3.4)
mind-map
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Mind-maps are very good revision tools. Our minds learn by
making patterns. Mind-maps help you to make these patterns
and so makes the content easier to learn and remember.
BEFORE you start this unit (in pencil) ...
•write the key idea of this unit in the centre of the page
•write what you know about this idea around it and draw lines to them.
•try and group the ideas together
AFTER you finish this unit (in pencil) ...
•remove anything that doesn’t belong to this unit
•ensure that things are grouped together appropriately. Move stuff around if needed
•add any extra ideas that you think are missing
MARKET
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Markets work when firms can stop customers from consuming their good or service when
they don’t pay. But what happens if you can’t stop people from consuming your good even if they don’t pay?
This unit looks at the idea of public goods ... goods or services which firms don’t run
out, i.e. are not scarce .. and firms can’t deny access to them. As you’ll see markets won’t
provide these goods even if society as a whole wants them. So the government has to step
in to address this market failure.
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by the end of this unit, you should be able to answer these questions...
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what are public goods?
public goods
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how can governments
resolve public goods?
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This topic looks at what public goods are and why markets will fail to provide them ... even
when society as a whole might want them.
It then looks at how the government can intervene in the market to ensure that certain
public goods are provided to consumers / households.
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by the end of this topic, you should be able to...
o define what a public good is
o explain why markets fail to provide public goods
o describe how the government can intervene to provide certain public goods
o evaluate the equity and efficiency of government intervention
remember - try the exercises and then read the notes to learn what you don’t know.
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MARKET FAILURE (3.4)
Describe
or services.
how the government could exclude users from accessing and consuming the following goods
books in a bookshop
__________________________________________________________________
__________________________________________________________________
town park
__________________________________________________________________
__________________________________________________________________
national park
__________________________________________________________________
__________________________________________________________________
motorway
__________________________________________________________________
__________________________________________________________________
immigration into New Zealand __________________________________________________________________
Exercise 3.1
Public Goods
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_________________________________________________________________
radio broadcasts
__________________________________________________________________
__________________________________________________________________
information on the internet
__________________________________________________________________
__________________________________________________________________
access to a beach
__________________________________________________________________
__________________________________________________________________
Now take each of the items listed above and rank them on the scale below.
Private
Goods
Mixed
Goods
Public
Goods
MARKET FAILURE (3.4)
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Public Goods
Goods
Graph 1: MARKET FOR A PUBLIC GOOD
Costs /
Benefits ($)
Maximum
Capacity
SMB
Quantity
1.On Graph 1 above, identify:
b. the quantity of public goods that would be supplied by private firms (label it Q1)
c. the socially desirable output level (label it QS).
2. Explain the quantity of public goods supplied by private firms.
____________________________________________________________________________________________
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____________________________________________________________________________________________
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Congestion of facilities occurring in National Parks
In New Zealand much of the cost of facilities (e.g. huts, viewing platforms) in National Parks is paid for by the
government out of the general tax pool. Department of Conservation (DOC) reports identify that people
are using the parks to “experience the sounds of nature” or to “get away from the stresses of civilisation”.
However, increased use of National Parks is causing congestion at popular sites, which reduces visitors’ chances
of receiving these benefits. One solution suggested is making visitors pay to use National Park facilities.
Public Goods
3. One public good supplied by the New Zealand government is National Parks. Name another public good
supplied by local or central government.
4. Adjust Graph 1 to illustrate congestion of facilities at New Zealand National Parks because of increased use.
a. Label any curve changes.
b. Identify a ‘user pays’ charge that would stop congestion of facilities (label it P1).
Exercise 3.2
Source: http://www.treasury.govt.
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MARKET FAILURE (3.4)
Answer the multiple choice questions below:
1.
A good that is both rival and excludable is a . . .
a. private good.
b. public good.
c. collective good.
d. free good.
2.
Public goods are goods that . . .
a. can only be used by the public sector.
b. can only be used collectively.
c. when used by one person, are still available for others to use.
d. must be financed by the user-pays principle.
3.
Public goods are likely to be under-supplied in a free market because . . .
a. consumers prefer private goods.
b. free-riders will only provide them for themselves.
c. a private producer cannot exclude nonpaying consumers from the benefits.
d. they are too costly for private producers to produce.
4. The following statements describe ways in which the government may encourage the production or
consumption of a merit good. Which statement is the ‘odd one out’?
a. Subsidising private sector providers of the good.
b. Public provision of the merit good.
c. Allowing consumer sovereignty to prevail.
d. Educate people as to the benefits of using the good.
Exercise 3.3
Public Goods
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5.
Which of the following statements is true?
a. Collective goods are provided by the government from taxation.
b. The government requires the compulsory consumption of merit goods.
c. Sky TV is an example of a public good.
d. Free-riders are a problem with demerit goods.
6.
Public goods . . .
a. use up extra resources as additional people consume them.
b. tend to have their costs met by user-pays charges.
c. once provided for one person may be enjoyed by free-riders.
d. have the same characteristics as private goods but are state-owned.
7. When one person consumes a good, it is possible to provide it to others at no additional cost. This good may
be described as . . .
a. non-excludable by price.
b. non-rival.
c. a free good.
d. a normal good.
8.
Private provision of public goods . . .
a. may fail because of the inability to collect a price from the consumers of the product.
b. succeeds because public provision is often less costly.
c. succeeds if consumers are expected to obtain marginal benefits from the consumption of the public good.
d. fails because private firms generally have higher production costs than public operations.
9. The free-rider problem refers to people who . . .
a. will only consume a public good if it is free.
b. for efficiency’s sake, should be allowed to consume public goods (such as mass transit) even if they do not have
to pay.
c. will not voluntarily pay for a public good even though they benefit from its provision.
d. are not willing to pay for a public good because they lack information about its potential benefits.
10.If a good is a public good, then . . .
a. people who do not pay can be excluded from consuming the good.
b. people who do not pay cannot be excluded from consuming the good.
c. consumption is regulated.
d. consumption is deregulated.
MARKET FAILURE (3.4)
Public Goods
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notes
What are Public Goods?
A second type of market failure is when markets don’t provide “public goods”. Public goods are any
good (or service) that has the following two characteristics:
Non-rival (non-depletable)
The use of the good does not reduce the amount of the good available to others (e.g. light from lighthouses, national defence)
Non-excludable by Price
Users cannot (realistically) be blocked from using or consuming the good if they don’t pay.
Figure 3.1 ... Examples of Public Goods
Street Lighting
non-rival: When one car drives along the road at night-time this does not reduce the amount of light available to other cars
driving along the road.
non-excludable by price: It would be near impossible to make streetlights available to only those cars who had paid for them.
National Defence
non-rival: When the army defends the nation, all people are defended, not just those who may have paid for the service.
non-excludable by price: It would be very difficult to defend only certain (paying) households.
Roads
non-rival: The use of a road by one car has minimal impact on roads (trucks are different). However, the use of one car does
contribute to traffic jams.
non-excludable by price: It would be difficult (but possible) to stop certain cars from entering a road network. Privatising one road
is possible but it is much harder to keep non-paying cars off an entire roading network (e.g. ALL the streets in your town or city).
Public Goods:
Goods that are non-rival and non-excludable by price.
Private Goods: Goods that are rival (i.e. scarce) and excludable by price.
Mixed Goods:
Goods that are half-way between public and private goods.
Why Do Markets Fail to Provide Public Goods?
Producers provide a good or service when they have an incentive, i.e. they can charge consumers a
high enough price to cover their costs and earn an economic profit. To do this, firms must be able
to stop consumers from using a good or service if they don’t pay, i.e. the good must be excludable
by price.
Because public goods are non-excludable, some people will tend to avoid paying to use the good,
i.e. they will free-ride. This limits private firms’ ability to earn a profit and so they don’t produce
public goods. Figure 3.2 illustrates the issue of public goods on a production possibility curve.
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MARKET FAILURE (3.4)
Private
Goods
Figure 3.2 ... Public Goods and PPC’s
ECE
Without intervention, the
market (ECE) will not produce
any public goods as they can
not earn a profit from them.
EAE
Government intervention is
required to achieve EAE , if
society wants some public
goods provided.
Public Goods
Free-Rider: Someone who uses a good or service for free, when she or he is
supposed to pay to use it.
Government Intervention: Collective Provision
If private firms won’t supply a public good, the government can step in and provide the good or
service to the public, paying for it out of taxes. This is the government’s allocative role. A good
funded from taxes is called a collective good.
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The government has an advantage over private firms because it can force people to pay for a good
or service, i.e. it can tax them. It can then use these taxes to provide the public good.
The problem with this approach is that it can be inequitable. All people are charged taxes but may
not consume the goods and services provided by government. For example, if you pay rates to the
local council which uses it to build local roads and then walk to work (school) . . . you are paying
for a good that you do not use.
This is why governments are usually very careful about what they fund collectively. Governments
typically only fund goods and services that benefit large parts of society or are considered to be
good for people and society chooses to provide free or at a very low cost to users.
Figure 3.3 ... Examples of Collective Goods
Street Lighting
As firms are unable to stop people from accessing street lighting while they drive at
night, they will not provide this service. Therefore, it is provided by local government,
funded from rates.
National Defence
Funded from central government taxes.
Roads
The majority of roads are provided free of charge. Highways and motorways are
provided by the New Zealand Transport Agency (formerly Transit New Zealand), paid
for by central government taxes. Local roads are funded from rates. Roads are made
by local firms but paid for from taxes.
Collective Good: A good that’s funded from taxes.
MARKET FAILURE (3.4)
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Government Interventions - Equitable and Efficient?
Equity
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Efficiency
remember - try the exercises and then read the notes to learn what you don’t know.
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UNIT 3
Public Goods
Unit Content:
Understanding
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(poor)
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3.1 Public Goods
• What are Public Goods
• Why Do Markets Fail to Provide Pulic Goods?
• Government Intervention: Collective Provision
checklist:
I have ...
 done a mind-map of the main ideas (before and after I’ve done the work)
 tried (and marked) all of the exercises
 watched the online videos of this work
 read the notes and summarised the key ideas in the margins of the pages
 made (or downloaded from quizlet) flashcards of the key ideas and definitions
3
relevant current events and examples:
relevant events and examples for this unit are:
I didn’t really get the following parts of this unit ...
... and I’m going to ask ___________________ to help me with this
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(good)