2.10 Public Goods

Question 1

What is a public good ?

Answer 1

Public goods are products which exhibit the characteristics of non-excludability and non rivalry in consumption. Public goods are consumed collectively (publicly), the market would fail to allocate resources to provision of public goods, there would be a missing market, because no firm would be willing and able to supply public goods

Question 2

What is the difference between pure public goods and quasi-public goods ? And what does this mean for the market of the goods

Answer 2

• Pure public goods: display the characteristic of non-rivalry and non-excludability fully, this is not common. There is a missing market due to no supply in a free market
• quasi-public goods: are nearly public goods, having some characteristic of pure public goods, they are non-rival and non-excludable in consumption to varying degrees, the market fails to efficicinetly allocate resourcese.g under allocation to building of roads

Question 3

What does the characteristic of non-excludability mean ? And what problem does this run into ?

Answer 3

• occurs when individual consumers Cannot be excluded from consuming a product
• e.g US nuclear deterrence, this service is consumed by all US residents and non US residents, individual consumers cannot be excluded
• non-exludability creates a free rider problem because consumers have no incentive to contribute by paying for the service, as they cannot be excluded from consuming it.

Question 4

What does the characteristic of non-rivalry mean ?

Answer 4

Occurs when consumption of a product by 1 individual does not limit the consumption of the product by another individual (non-diminishable)

E.g nuclear deterrence, consumption by 1 individual does not affect consumption by all others, the utility gained by other consumers is not diminished

Question 5

What does the characteristic of non-rejectability mean?

Answer 5

This describes a Situation where individual consumers are unable to reject consuming the G/S even if the consumer would prefer not to consumer it.

Question 6

What does the additional characteristic of no marginal cost in supply mean ?

Answer 6

• Once supplied, the cost of supplying to an additional individual is zero.
• with pure public goods the full costs are encountered when supplying for 1 individual and any number of additional consumers does not add any additional costs

Question 7

Why does the government need to intervene in the market for pure public goods ?

Answer 7

• private firms are unwilling to produce pure public e.g flood defence schemes. Since those who will benefit will often not pay in hope that others will pay for the scheme, knowing that they cannot be excluded from consuming the service, they free ride
• this means the government will often need to intervene in some way to ensure essential public goods are provided, they may have to provide pure public goods or increase the quantity produced of quasi public goods.