My 523). Public goods for which it
My concern in this essay is to describe public goods as asource of market failure and to explain why markets generally fail to allocatethem in a Pareto efficient way.SECTION 1:Paul. A.
Samuelson in the “The Pure Theory of Publicgoods” defined collective consumptiongoods as goods ‘which all enjoy in common in the sense that each individual’sconsumption of such good leads to no subtraction from any other individual’sconsumption of that good’.A more technical definition defines public goods as being non-excludable andnon-rivalrous.A public good is non-rivalrous when it benefits all individuals, in the sensethat once the good is provided, everyone can enjoy its benefits withoutlimiting the benefits enjoyed by others.
In other words, non-rivalry refers tothe inefficiency to exclude someone from using a public good, when the cost ofserving an additional person is equal to zero.It can also be non-excludable, meaning that is practically impossible toprevent someone from using the good and charge them for the costs of producingit. If I buy, for instance, a slice of pizza (private good) by purchasing it Igain the right to exclude others from having the same slice of pizza, but if weconsider a public service e.g. national defence – which is both non-rivalrousand non-excludable – then there’s no feasible way to exclude someone from receivingthe benefits of national defence protection.
Generally, pure public goods are defined by both the non-rivalry and non-excludabilitytraits, whereas public goods – such as satellite TV or a copyrighted book – aremainly characterized by non-rivalry (The Core Project, p. 523).Public goods for which it is possible to exclude others are called club goodsand goods that are rival in consumption, but not excludable are referred ascommon-pool resources e.g. fisheries (The Core Project, p. 524).The key issue that highly affects the efficient provision of public goods inthe markets is referred as “the free rider problem”, which occurs due to thenon- excludability characteristic of public goods.
This happens because when agood is available to all, some people will be tempted to free ride and enjoythe benefits without actually having to contribute to it, therefore if everyoneis able to free ride then there would be no incentive left to produce itthrough the market.One method businesses can use to solve the free riding problem is developing mechanismsto exclude nonpayers from enjoying a specific service e.g. TV broadcast ordigital music, but clearly the same approach cannot be made with every single publicgood.Since individuals cannot be charged for the use ofcollective goods, private firms do not find it profitable to produce and supplythem. If people cannot be prevented from consuming public goods, it becomesinfeasible to sell them the same way as private goods.
For the reasons stated above, the government interventionis most of the time required to supply public goods. Even the classic economist Adam Smith argued inhis Wealth of Nations that one of thethree main government duties is to provide for those goods of which benefitscan be extended to the collectiveness, or more precisely, he stated:”The third and last duty of the sovereign or commonwealth, is that oferecting and maintaining those public institutions and those public works,which though they may be in the highest degree advantageous to a great society,are, however, of such a nature, that the profit could never repay the expenseto any individual, or small number of individuals; and which it, therefore,cannot be expected that any individual, or small number of individuals, shoulderect or maintain. The performance of this duty requires, too, very differentdegrees of expense in the different periods of society”. ((1776: Bk 5, chapter1).Public goods do not necessarily need government’s provision; some of them canbe supplied privately, through charity for instance and others are just naturallyavailable e.g. beaches, rivers, clear air, etc. However, public goods arecrucial for the well-being of the society and they satisfy important collectiveneeds, therefore government must come into play if it wants to ensure the correctdevelopment and stability of its economy.
SECTION 2: Having established the need of government action to provide for public goodswhen the private sector fails to do so, I shall move on to the ways and meansit can use intervene to address the market failure.Before attempting to supply for a public project policy makers shouldinvestigate the demand for the goods which are actually required and demandedby citizens as well as performing a cost-benefit analysis to compare the totalbenefits with the total costs of providing the goods in question.According to the standard cost-benefit logic, government should increase productionuntil marginal benefits equal marginal costs, if the marginal benefits exceedthe marginal costs of producing the next unit, then it should be provided.After that it can calculate the market demand for the public good by summing verticallythe individual demand curves to measure the amount of money consumers arewilling to pay for each unit of the public good (Acemoglu et al, pg. 218-219).
The question is: how can the governmentfind all the information regarding people preferences and WTP to derive themarket demand curve for a public good?One problem that concerns the government when dealing with a public good isestablishing the actual demand for it, because the issue, in fact, arises inthe demand side of the market for these goods, but how can it find all theinformation regarding people preferences and WTP to derive the market demandcurve for a public good?Contingent evaluation surveys can help obtain information to measure demand ofnon- marketed goods by asking people about their willingness to pay for theprovision of a specific public project. CV surveys are usually used forproblems concerning the environment, but unfortunately they do not always takeaccount of different variables such as the people’s ability to pay or theirbudget constraints as well as how much they want and they are informed aboutthe good in question. Overall these different variables make CV surveys flawedtool for gauging demand for public goods (J. Anomaly. p.
113-114).Voting is another method used to assess the demand for a public good anddetermine society’s preferences for a particular policy but like CV, this toolis not infallible because some voters may vote strategically or not vote atall, thus not reveal their true preferences (Batina & Ihori, p.54).
Eventually, the government will find all the information needed – since somepublic goods, as I have said earlier, are essential for the society well-being- and move on to producing them.The benefits of public goods provide an argument for imposed taxation sincepeople can be made better off by requesting them to do something that willunlikely do voluntary. This method can help overcome the free rider problem –up to an extent – but taxation means also that some people will be turned into”forced riders”, because they will still contribute to the public good eventhough the benefits arising form it are low (Cowen, Tabarrok, pg. 356)Government can also help enforce contracts and resolve disputes for localpublic goods that are not consumed by many people and facilitate theirprovision by altering property rights or reducing transaction costs i.e.
costsof bargaining (J. Anomaly. pg.