Public goods are non-excludable and non-rival. Because of that, there is no incentive for provision from profit-maximizing private firms due to the free-rider problem (rational decision from individuals by not paying for public goods). As a result, these goods might be under-provided, so there should be more resources used to be able to achieve allocative efficiency. Public sector might directly provide these kinds of goods, so the situation of under-provision might be resolved, as they often don’t aim for maximizing profit.
Demerit goods such as cigars might be over-provided in a free-market economy due to the information failure from consumers, as its perceived cost is smaller than true cost. Public sector might help to improve allocative efficiency by propaganda and giving information about demerit good’s cost to adjust consumer behavior (paternalism). Furthermore, they can use micro-economic efficiency such as increasing taxes and decreasing subsidies to discourage people from consuming and producers from producing demerit goods. Last but not least, by using legal tools on hand, the public sector might forbid people from consuming and producers from producing more demerit goods.
In conclusion, the public sector plays a vital role in achieving allocative efficiency for public and demerit goods. Public goods provision from the public sector is necessary for allocative efficiency, but it could put a huge pressure on the government budget, especially for LEDCs, which can lead to debt traps (like Belt and Road initiative cases of Cambodia and Bangladesh). Information provision about the cost of demerit goods can be useful to adjust consumer behaviors, though paternalism might be criticized for its violation in personal freedom values, which is crucial in some western cultures like US and Western Europe. So the government intervention on these kinds of goods should be clearly analysed before taking any actions. If any of the 4 measures regulation, direct provision, taxes subsidies and information provision do not work, the public sector should consider the others
NO. This means achieving the lowest average cost of production
to maximize total surplus
as they can use taxation to pay for the cost of the good
Here a graph would help in which you show the concepts of MSB and MPB
this is all good, but it could be more part of your evaluation. I need you to explain more why demerit goods require gov't intervention
great evaluation for this part