Public Goods and Market Failure

Transcription

1 Public Goods and Market Failure AS Economics PowerPoint Briefings 2006 AS Economics

2 Introduction Businesses in the private sector of the economy 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 public goods!

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 Private Goods Private goods are rival One person's 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 Private goods are rejectable Private goods can be rejected

5 Private Goods Private goods and service are rival and excludable The private sector can supply private goods because they can charge consumers and make a profit

6 Digital pay per view an excludable private good a growing market too! Sporting events Movies News Internet services Online libraries Repeat TV

7 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

8 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 Non-rejectable If a public good is provided, we cannot avoid it

9 Public Goods? The benefits of water filtration systems, the enjoyment from a fireworks display, the light for passing ships from a lighthouse are these examples of pure public goods?

10 Goods and services public or private? The Forth Road Bridge Mass MMR vaccination programme The Fire Service The Police Service National nuclear defence system Analogue broadcasting services Pay per view television provided by Sky TV Street lighting Air waves / radio spectrums The M25 motorway on a quiet Sunday morning The M6 Toll Road Ticket to Chelsea v Barcelona in the Champion s League A large scale fireworks display in a local town

11 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 Street Lighting Firework Displays

12 Semi-Public (Quasi) Public Goods These are products that are public in nature, but do not exhibit fully the features of nonexcludability and non-rivalry They may become non-rival e.g. at peak times when congestion occurs On grounds of equity the government may provide these goods directly and finance them through general taxation

13 Semi-Public (Quasi) Public Goods There is an element of excludability or rivalry in consumption Examples might include: Motorways and major roads Parks Terrestrial television (public service broadcasting) Police Force protection Galleries and Museums Airwaves

14 Are beaches pure public goods?

15 What about the air waves?

16 Auction of mobile phone licences In 2000 the UK government auctioned off five licences for 3 rd generation mobile phones In total, telecoms companies bid 22 billion! They are now saddled with huge debts Did the government have the right to sell off what people perceive to be a public good? Or are air waves a commodity like everything else? An example of the winner s curse?

17 Why does the state provide public goods? On grounds of equity so that people on all levels of income can have access to them Provision on grounds of need rather than ability to pay On grounds of efficiency Easier to provide them collectively Economies of scale from providing to all? To overcome the free-rider problem To correct for market failure the failure of the market to provide sufficient public goods

18 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

19 The Free Rider Problem Another example might be a group of residents in a block of flats who all stand to benefit from better lighting and security systems, but who individually might try to avoid payment and benefit once the improved amenities are in place Given the nature of the free rider problem, public goods are often financed through some form of enforcement, notably the compulsory nature of the TV Licence fee

20 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.

21 Public bads Environmental damage and global warming affects everyone no one is excluded from the disbenefits of others polluting economic activity Incidences of this are called public bads