Question

Question 3 [20 marks] (i) What is a public good and why does the market fail in the presence of a public good? (5) (ii) Explain how we can resolve this issue where the existence of a public good causes market failure. (5) (iii) Why will private markets produce an inefficient output of a public good? Explain how the efficient level of a public good is determined. (5) (iv) Education is frequently cited as a source of external benefits. In what way, if at all will your receiving university education benefit other people? (5)

Answer 1

1)Public good is a good that is both non-excludable and non-rivalrous in that individuals could be enjoyed without paying for it, and where use by one individual does not redue availability to others or the goods can be effectively consumed simultaneously by more than one person. Public goods causes inefficiency because nonpayers cannot be excluded from consumption, which then prevents voluntary market exchanges. Reasons for market failure include: Positive and negative externalities: an externality is an effect ona third party that is caused by the consumption or production of a good or service Lack of public goods: public goods are goods where the total cost of production does not increase with the number of consumers. Key terms for market failure Externalities: These occur when a third party is affected by the decisions and actions of others. Social benefit: the total benefit to society Private Marginal Benefit (PMB) +External Marginal Benefit (XMB) Social Cost: is the total cost to society Private Marginal Cost (PMC) External Marginal Cost (XMC Social Efficiency: This occurs when resources are utilised in the most efficient way. This will occur at an output where social marginal cost (SMC) Social Marginal Benefit. (SMB 2)Overcoming Market Failure Tax on Negative Externalities - e.g. Petrol tax Carbon Tax e.g. tax on CO2 emissions Subsidy on positive externalities- why government may subsidies public transport Laws and Regulations-Simple and effective ways to regulate demerit goods, like a ban on smoking advertising. Buffer stocks-aim to stabilise prices Government failure - why government intervention may not always improve the situation 3) private markets produce an inefficient output of a public to be rivalry and excludable, and better use product. Some of the public goods are not produce by private sector- national defense The best way to analysis of public goods efficiency is with the demand for public goods because of public goods are ponrival in consumption, everyone can benefit at the same time. the demand for a public good is found by summing the price that each person is willing to pay for a given quantity 4)benefits of education Reduces poverty-420 million people would be lifted out of poverty with a secondary education, thu:s reducing the number of poor worldwide by more than half

Increases income-One extra year of schooling increases an individual's earnings by up to 10%. Makes people healthier-Children of educated mothers are more likely to be vaccinated and less likely to be stunted because of malnourishment. Boosts economic growth-Each additional year of schooling raises average annual gross domestic product (GDP) growth by 0.37%. Reduces child marriage-Each year of secondary education reduces the likelihood of marrying as a child by five percentage points or more Reduces maternal deaths-If all mothers completed primary education, maternal deaths would be reduced by two-thirds, saving 189,000 lives. Promotes gender equality-one additional school year can increase a woman's earnings by 10% to 20%