Question

1. Provide an example of a ‘public good’ that is provided by the local, state or federal government. Use the concepts of ‘excludability’ and ‘rivalry’ to explain why is it a public good? [5 marks]

b. Suppose four beef cattle farmers all have access to a grassy paddock that they let their cattle graze on and none of the farmers own the land or communicate with one another.

1. What are the farmers likely to do and what will be the result on the grassy paddock?

2. What is this situation referred to and briefly explain how it could be avoided?

c. Consider the issue of air pollution. Use an appropriate diagram to support your written answer to the following questions.

1. If the government uses ‘command and control’ is the outcome of the policy likely be efficient?

2. Why might a Pigouvian tax be preferred to ‘command and control’ policy?

Answer 1

ans a)

The features of public goods are :

1. 'Non-excludability'- The advantages derived from public goods can’t be confined only to those who have paid for it. In fact non-payers can enjoy the advantages of consumption at no financial expenditures – economists term this a 'free-rider' issue. With private products, consumption finally depends upon the capability to pay
2. 'Non-rival consumption'- Consumption by a customer doesn’t restrict consumption by other customers – in other words the MC of supplying a public product to an extra individual is 0. If its supplied to one individual, its available to all.
3. 'Non-rejectable'- The communal supply of a public product for all implies that it can’t be rejected by persons..

Examples - flood control systems, public water supplies & national defense services.