Question

While in most circumstances the market is an efficient way to allocate goods and services, it may sometimes fail. When we use the term “market failure,” we are not referring the market failing to reach its equilibrium but rather the equilibrium that it reaches fails to be the optimal outcome from society’s perspective. The book refers to four sources of market failure. For this discussion, you will focus on public goods as a source of market failure.

Explain what determines the "optimal" amount of a public good and how this concept of optimality can change over time (as we elect new and different leaders). If you use any other sources, be sure to cite them within the text as well as provide a bibliographical citation at the end.

Watch the video on a common illustration of public goods: A Deeper Look at Public Goods  

Provide one "unique" (i.e. don't use one that a classmate has already used!) example of the free rider problem that you have seen in your lives. From this example, identify what is causing the market failure and a possible way to solve this problem.

Answer 1

Public goods as a source of market failure :

Public goods are such goods where the total cost of production does not increase wi the number of customers . The optimal amount of a public good is determined by the social marginal cost intersection with the marginal benefit . Social marginal cost is the sum total of private marginal cost and externality . Optimal amount changes overtime with new regulations , whereby there are restrictions on usage on certain kinds of public goods .

Example of free rider problem : mosquito abatement programme or national defense .

As for example in case of national defense no one can be excluded from the facility . One way to solve it is to collect compulsory taxes in order to finance national defense .