Reason 3 - Public goods - A-Level Economics Revision - XtremePapers

Reason 3 - Public goods

Even when the market appears to be working perfectly, we can have a problem with some goods. These are:

• public goods;
• merit goods; and
• demerit goods.

These may all be supplied in the “wrong” amounts, or even not supplied at all. When this occurs, it renders the market system inefficient and it is failing in this area

Public Goods

These are collectively consumed and the market may simply not supply them; e.g., defence of the country (a police force and army), a fire brigade, street lighting, or lighthouses. The market system does not work well in this area.

Some goods are “semi-public goods”, “quasi public goods” or “collective consumption goods”, for instance roads. These are often supplied by the state, but in principle they can be privately supplied, and sometimes are. Examples include the British Toll Roads in the Nineteenth Century or the péage motorways in France today; when you use them, you pay.

In some countries, such as Thailand when I lived there, the fire brigade falls in this area. People insure with a private fire brigade and call them when the house is burning. If you are not insured and you still call them, the market swings into action and they negotiate a rate on the spot for putting out the fire – given the urgency of the event, the demand by the burning house owner is highly inelastic and the price can be very high indeed!

Public goods require

• The lack of ability to exclude (if I am defended, so are you, even if you do not pay!)
• The consumption by one does not reduce the consumption available to the others (if you walk down the street after dark you do not use up any of the street lighting.)

These two requirements may be called the “non-rivalry” and “non-excludability”
features.

One of the jobs of government, both central and local, is to supply public goods or services that are needed but otherwise would not be made available by the market.