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Public Goods

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Public Goods The government spends huge sum of money each year on public goods. To understand the nature of these goods more clearly, and why the government is left to provide these for people throughout the economy, we must consider the characteristics of private goods Private Goods A private good has three main characteristics: Excludability: Consumers can be excluded from consuming the product if they are not willing to pay for it (for example - a ticket to the theatre or a meal in a restaurant) Rivalry: One person's consumption of a product reduces the amount available for other people to consume - because scarce economic resources are used up in producing and supplying the good or service Rejectability: Private goods and services are rejectable - if you don't like the look of the soup on the college menu, you can reject the chance to consume it and use your money to buy something else. Characteristics of public goods The characteristics of pure public goods are the opposite of private goods. They are services which are clearly in demand, but which must be provided collectively by the Government for two main reasons: Non-excludability - goods cannot be confined to those who have paid for it. ...read more.


Externalities are pervasive. The negative externalities of air and water pollution have long been of concern. Recently, the problems of global warming (a negative externality associated with excessive carbon dioxide emissions, notably from cars and power stations) and the depletion of the ozone layer (associated with the use of chlorofluoro-carbons, primarily in aerosols and refrigeration systems) have attracted world-wide attention. But these are also positive externalities such as the benefits associated with vaccinations and education. Why externalities cause a misallocation of resources? In the presence of externalities, the equalities between private and social costs and benefits no longer hold. A negative externality imposes a marginal external cost (MEC) that enters into the marginal cost but not the marginal private cost (MPC): MSC = MPC + MEC. It is apparent that whenever MEC is nonzero MSC willl not equal MPC and there will not be an efficient allocation of resources. There is market failure. An efficient allocation of resources requires that marginal social cost (MSC) equal marginal social benefit (MSB). The theorem holds only if MSC=MPC (marginal social cost equals marginal private cost) and MSB=MPB. In the presence of externalities, these equalities between private and social costs and benefits no longer hold. ...read more.


Under discussion as a response to the problem of global warming, carbon dioxide would involve levying taxes on all goods that emit carbon dioxide in production or consumption, with the rate of tax determined by the amount of carbon dioxide emitted. (iii) Effluent fees: Another possible form for government intervention is to impose effluent fees. In contrast to Pigouvian taxes which tax the good that generates the externality, effluent fees tax the externality itself. The offending firm is charged a fee of $x per cubic metre of pollutant emitted. The advantage of this approach over Pigouvian taxation is that it creates an incentive for the firm to explore alternative production techniques that are cleaner (i.e produce less of the externality). (iv) Direct Regulation: This involves Government setting maximum levels of emissions for different pollutants. Under this approach, firms are legally required to reduce their emissions to these levels (regardless of the cost). Direct regulation, like effluent fees, creates an incentive for firms to choose the most efficient production technique. However, it does not reduce the level of pollution in the most efficient manner because it fails to take advantage of the fact that some firms may be able to reduce their emissions at much lower cost than others. It may, however, be significantly easier (and hence less costly) to monitor than effluent fees. By Afzal Yearoo ?? ?? ?? ?? 1 ...read more.

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