Public sector and economic efficiency in providing public and demerit goods.

Authors Avatar by duongvietnam2004gmailcom (student)

Points of development:

  • Definitions of economic efficiency (2)
  • Analysis of how the public sector may improve allocative efficiency for public goods (3)
  • Analysis of how the public sector may improve allocative efficiency for demerit goods (4)
  • Evaluation of which factors may contribute to the success or failure of each policy (2+2)

Note: the mark scheme suggests other ideas for the development but we haven’t discussed them yet. Later on in the year you will be able to provide a more detailed answer drawing from different units.

Economic efficiency refers to the use of resources that create no waste. It include to production efficiency (producing one extra units of one goods without decreasing the quantity for another good) and allocative efficiency (produce appropriate output base on consumer preference)

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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 ...

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