market Failures and Price Controls.pptVIP

* * * * * * * * * * * * * * Government Provided Goods Government may provide particular goods and services. Generally, these goods may be those with positive externalities (including public goods). However, government may also choose to provide goods that do not have positive externalities for political advantage or in response to social preference. There is no consensus among economists as to when this desirable or not. This is the problem with public goods. Free riders are people who receive benefit without paying cost. If there is a free rider problem, the market will be inefficient. Free Rider problem Inefficiencies of Free Riders Efficiency occurs when marginal benefit = marginal cost. If marginal cost marginal benefit, we are consuming too much. It is not worth producing the good anymore. If marginal benefit marginal cost, we are consuming too little. We could consume a bit more and the benefits would still outweigh the costs. If the free rider problem exists, even though there is a high marginal benefit, people will not pay. We will under-consume, under-produce, and be inefficient. Solution to Public Goods Problems There are different ways to resolve the problems posed by public goods. The government can provide public goods. Because the government has the power to tax and, more importantly, to enforce tax laws, it can raise the money to pay for public goods. This is the case with national defense. Private firms can sometimes find ways to earn revenues in other ways. For example, broadcast television can use advertising to pay for production without charging consumers directly. This is often not a sufficient solution. Consensus on Public Goods Economists believe that public goods exist. It is difficult to determine exactly what a public good is. It is difficult to determine how much of a public good the government should provide. There may be other means of solving free rider problems in some instances. The social optimum must be estimated. Thus, despite t