economics of public sector

Topics: Public company, Public good, Initial public offering Pages: 41 (24764 words) Published: November 3, 2014

WHAT ARE PUBLIC GOODS, MERIT GOODS AND IMPURE PUBLIC GOODS? WHAT KIND OF A PROBLEM IS ASSOCIATED WITH THE PROVISION OF PUBLIC GOODS? WHAT ARE THE REMEDIES? A public good is a good or service that can be consumed simultaneously by everyone and from which no one can be excluded—nonrival and nonexcludable. They are determined in terms of their economic rather than their administrative, physical, normative or financing charateristics. The market will fail to exist for public goods because they are: Nonrival: Consumption by one person does not decrease the consumption opportunities of another person. Nonexcludable: It is impossible or uneconomical to prevent someone from consuming the good once it is produced. The market economy under-produces these goods because it is impossible to exclude non-payers from enjoying them. Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good . This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally. Merit goods – goods or services (such as education and vaccination) provided free for the benefit of the entire society by the government. A merit good can be defined as good which would be under-consumed and under-produced in the free market economy. This is due to two main reasons: 1.When consumed, a merit good creates positive externalities. This means that there is a divergence between public and private benefit when a merit good is consumed. As consumers only take into account private benefits when consuming merit goods, it means that they are under-consumed (and so under-produced) 2. Individuals are myopic, they are short-term utility maximizers and so do not take into account long term benefits of consuming a merit good, and so they are under-consumed. The private sector won't provide these goods in sufficient quantity, then the only way more will be provided is either if the government encourages firms to produce more (perhaps by subsidising the good or service) or if provides them itself. A significant proportion of government expenditure arises from the government providing merit goods. There are many hybrid goods that posses some features of both public and private goods but whose consumption by one consumer does not preclude other members of society from consuming them to some extend. This category is called impure public goods. A perfect example is a highway system. Once built, everybody who owns a vehicle can use it. That means the impure public good can also be consumed jointly. However, in some instances there is a way to exclude certain individuals from using them or at least make them pay for the consumption by using tolls. Why would anyone want to exclude some people from enjoying the highway system? Because increasing the group size of consumers decreases the marginal benefit to an individual - the highways are getting too crowded. Impure public goods can be divided into:  Private Goods: An economic good, or a tangible item that can be purchased and traded within a market. Private goods are excludable. They are also rival, or subtractable. You can't eat a hamburger that is being eaten by someone else. Club Goods: Goods that are excludable but non-rival, or non-subtractable. This means that while certain people can be excluded from the consumption of a good, one person's consumption of it does not diminish another person's. For example: Community services, including those provided by religious organizations; cable television; computer software. Problem - If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. This saves each of us from our own tendency to be a free rider, while also assuring us that no one else will be allowed to free ride. One frequently...
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