<2.9 MARKET FAILURE (2): LACK OF PUBLIC GOODS>

• Why is it that when GROUP-WORK IS SET some of you wince? Is it because you will HAVE TO WORK WITH OTHERS WHO ARE LAZY AND YET WILL BE EQUALLY REWARDED FOR YOUR HARD WORK? If the teacher didn't insist on it, how many of you would prefer to work alone? Should group work even exist anymore?

• PUBLIC GOODS are goods or services that have the following TWO CHARACTERISTICS: 

(i) NON-EXCLUDABLE & 

(ii) NON-RIVALROUS.

• Like any good, the production of public goods INVOLVES PRIVATE COSTS OF PRODUCTION, as such PRODUCERS WILL ONLY BE PREPARED TO SUPPLY THE GOOD IF THEY CAN CHARGE A PRICE FOR IT AND MAKE PROFITS. HOWEVER the fact that the good is NON-EXCLUDABLE MEANS IT IS UNLIKELY THAT CONSUMERS WILL BUY THE PRODUCT, as they will be RELUCT TO PURCHASE A GOOD AT THEIR OWN EXPENSE, GIVEN THAT OTHERS WILL CONSUME IT WITHOUT PAYING (This is termed the 'FREE-RIDER PROBLEM'). 

• This LACK OF MARKET DEMAND means that the good, regardless of how much people desire it and gain benefit from its consumption, WILL NOT BE PROVIDED BY THE FREE MARKET, hence it is a MARKET FAILURE.

These types of goods are a subcategory of PUBLIC GOODS, in that they are NON-EXCLUDABLE yet are NON-RIVALROUS at times, and RIVALROUS at others. Examples include PUBLIC motorways, PUBLIC parks and even PUBLIC WIFI.

• As PRIVATE SECTOR PRODUCERS ARE UNWILLING TO SUPPLY public goods, GOVERNMENTS USUALLY STEP IN TO ENSURE THAT PUBLIC GOODS ARE PROVIDED.

• These are FINANCED BY TAX REVENUE and are AVAILABLE FOR FREE, or at VERY LOW PRICES.

• The PUBLIC GOODS they CHOOSE are usually the ones that CREATE POSITIVE EXTERNALTIES, however, as the goods have NO DEMAND CURVE calculating SOCIAL DEMAND can only be attained through SURVEYING PUBLIC OPINION, which is NOTORIOUSLY INACCURATE, furthermore as it is government-decided CORRUPTION can come into play.

• An alternative to directly producing the good or service, involves the government employing private firms to carry out the provision. This is referred to as 'CONTRACTING OUT'.

  • • ADVANTAGES of this method:

      • In choosing the private firms,  governments use COMPETITVE TENDERING, which involves the private firms competing with each other, which should result in the MORE EFFICIENT & AND LOWER COST firm being SELECTED.

      • PRIVATE FIRMS ARE SPECIALISTS and therefore HAVE ACCESS TO BETTER SKILLED WORKERS, KNOWLEDGE & EQUIPMENT.

      • PRIVATE FIRMS are MORE PROFIT DRIVEN and therefore will be ENCOURAGED TO BE AS PRODUCTIVE as possible as well as INVEST IN BETTER TECHNOLOGY.

  • DISADVANTAGES of this method:

    • • GOVERNMENT CAN SHIFT THE BLAME for any issues onto contractors.

      • GOVERNMENT CAN LOSE CONTROL

      • PROFIT MOTIVE could result in CUT CORNERS and LOWER QUALITY.

      • MONITORING COSTS can be HIGH.