1.3.1 & 1.3.3 Types Of Market Failure & Public Goods

Question 1

Market failure

Answer 1

where too much or too little of a good is being produced and or consumed compared with the socially optimal level of output, or when the price mechanism leads to an inefficient allocation of resources

Question 2

Types of market failure

Answer 2

• externalities
• under-provision of public goods
• information gaps
• cyclical instability = macro economy = enters recession

Question 3

Private goods

Answer 3

rivalrous and excludable (you have to pay for it)

Question 4

Public goods

Answer 4

things consumed by everybody in a society or nobody at all. They are non-rival, non-excludable and non-rejectable

Question 5

Non-rival

Answer 5

one person consuming them does not stop another person consuming them

Question 6

Non-excludable

Answer 6

if one person can consume them, it is impossible to stop another person consuming them

Question 7

Non-rejectable

Answer 7

people cannot choose not to consume htem even if they want to

Question 8

Free-rider Free-rider

Answer 8

consumers getting the benefit of a good or service without paying for it

Question 9

Example of non-rival product

Answer 9

a radio or TV programme

Question 10

Example of a non-excludable product

Answer 10

lighthouse

Question 11

Why are public goods not provided by the private sector?

Answer 11

public goods have to be provided by governments, because people cannot be prevented from using them and firms have no incentive to provide them as they can’t make a profit

Question 12

Quasi-public

Answer 12

half public and private

Question 13

Ways to overcome market failure

Answer 13

• neg externalities = tax 20% in UK
• pos externalities = subsidy
• buffer stock

Question 14

Examples of market provision of public goods

Answer 14

Local communities raising money to pay for a local school

Question 15

Examples of public goods

Answer 15

• sanitation infrastructure
• flood defence projects
• national parks

Question 16

Quasi public goods example

Answer 16

• semi non rival and semi non excludable
• e.g crowded beaches, free wifi, busy urban parks

Question 17

Importance of public goods

Answer 17

• innovation (dynamic efficiency) (encourages people to commercialise research)
• technology needs public goods (e.g car needs road)
• social welfare
  ALL SECTORS OF THE ECONOMY NEEDS PUBLIC GOODS (environmental, corporate law, day care centres)

Question 18

Advantages of increased govt spending on public goods

Answer 18

• improve access and affordability (macro)
• long run econ growth (macro)
• overcome market failure

Question 19

How can increase govt spending on public goods lead to access and affordability?

Answer 19

• the absence of profit motive = public goods are affordable = important for equity

Question 20

How can increase govt spending on public goods overcome market failure?

Answer 20

• the free market might not provide it due to non excludabiiity, no rivalrous

Question 21

How can increase govt spending on public goods lead to long run econ growth?

Answer 21

• more efficient to provide at state level = lower LRC per user
• improve basic development outcomes (fiscal supply side policy)

Question 22

Disadvantages of govt spending on public goods

Answer 22

• diseconomies of scale
• corruption/government failure

Question 23

How can govt spending on public goods lead to diseconomies of scale?

Answer 23

• the absence of profit motive may lead to x-inefficiency & diseconomies of scale
• this reduce the value per pound of extra govt spending

Question 24

How can increased govt spending on public goods be hindered by corruption?

Answer 24

• in countries with weak institutions, higih govt spending = corruption/wasteful spending on vanity projects (political objectives)
• e.g military hardware, public buildings
• lead to loss of allocative efficiency & opportunity cost
• govt failure

Question 25

How can increased govt spending on public goods lead to govt failure?