Topic 8 - Market failure Public goods and govertnment intervention (policies) - Accessible version(1

Topic 8 - Market failure Public goods and govertnment intervention (policies) - Accessible version(1

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Prices & Markets Unit 8: Market failure Public goods and government intervention (policies)
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Outline 1. Public goods •. Public goods •. Common resources 2. Government intervention •. Price controls •. Taxes •. Subsidies RMIT University Vietnam 12/4/17 2
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1. Public goods - Introduction In the perfectly competitive market, property rights are assumed to be perfectly defined and enforced. This implies goods and services are excludable and rivalrous in consumption. In reality, many goods and services are associated with property rights problems: Definitions: Non-excludable: once produced, no one can be prevented from using the good; and Non-rivalrous: one person’s use of the good does not diminish other people’s use. 12/4/17 RMIT University Vietnam 3
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Examples for goods 12/4/17 RMIT University Vietnam 4
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Examples for good: Roads We can illustrate the four types of goods using the example of roads. Roads can fall into any of the four types depending on whether a toll system is enforced and whether there is congestion. 12/4/17 RMIT University Vietnam 5
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Market failure Private goods and club goods do not present market failure – they have prices attached to them. Public goods and common resources present market failure – externalities arise because something of value has no price attached: If a person were to provide a public good, for e.g. national defence, others would be better off and yet they are not charged for this benefit; If a person uses a common resources, for e.g. fish in the ocean, others would be worse off and yet they are not compensated for this loss. Due to these externalities, private decisions about production and consumption can lead to inefficient outcomes ( market failure ). Government intervention (public solutions) can potentially correct inefficiency and raise economic well-being 12/4/17 RMIT University Vietnam 6
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a) Public goods Definition : public goods are goods that are non-excludable and non- rivalrous. Some examples: Fireworks displays, lighthouses, national defence, basic research (knowledge), free-to-air TV and radio. Due to these two features, people have an incentive to be free riders: Definition : Free rider is a person who receives the benefit of a goods but avoids paying for it. The existence of free riders lead to the under-provision of public goods in the market (the free rider problem ).
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Public goods (cont) The market fails to provide the efficient outcome because those who gain a benefit from consuming the public good do not compensate the supplier for the production costs. Hence, the supplier has no incentive to provide the good. The government can remedy this problem by providing or subsidising the public good and paying for it with tax revenue, to make everyone better off. This is a public solution.
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