Government provides certain goods and services which cannot be provided by the market mechanism. Examples of such goods are national defence, roads, government administration etc. which are referred to as public goods.
There are two major differences between public and private goods. One, the benefits of public goods are available to all and are not only restricted to one particular consumer. For example, if a person wears a shirt, it will not be available to others. It is said that this person’s consumption stands in rival relationship to the consumption of others. However, if we consider a public park or measures to reduce air pollution, the benefits will be available to all. One person’s consumption of a good does not reduce the amount available for consumption for others and so several people can enjoy the benefits, that is, the consumption of many people is not ’rivalrous’.
Two, in case of private goods, anyone who does not pay for the goods can be excluded from enjoying its benefits. If you do not buy a ticket, you will not be allowed to watch a movie at a local cinema hall. However, in case of public goods, there is no feasible way of excluding anyone from enjoying the benefits of the good. That is why public goods are called non-excludable. Even if some users do not pay, it is difficult and sometimes impossible to collect fees for the public good. These non-paying users are known as ’free-riders’. Consumers will not voluntarily pay for what they can get for free and for which there is no exclusive title to the property being enjoyed. The link between the producer and consumer which occurs through the payment process is broken and the government must step in to provide for such goods.
Describe how the Government’s role in providing public goods impacts community welfare.
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Solution and Explanation
1. Accessibility to All:
Public goods are available to all members of society, and their consumption is not restricted to individual consumers. For example, a public park is available to everyone, and one person’s use of the park does not reduce its availability to others. This ensures that all members of society can benefit from these goods, promoting equality and community welfare.
2. Non-Rivalry and Non-Excludability:
Since public goods are non-rivalrous, the consumption by one individual does not diminish the amount available for others. Additionally, they are non-excludable, meaning that no one can be excluded from enjoying the benefits, even if they do not pay for them. The provision of these goods by the Government ensures that all members of society can enjoy them, which leads to an improvement in collective welfare.
3. Government’s Responsibility:
The Government provides these goods because it is difficult for private entities to profitably offer them. By investing in public goods, the Government fills the gap left by the private sector, ensuring that everyone has access to essential services, which enhances overall societal welfare. This contribution is vital in promoting economic and social development.
Define free-riders. Explain the challenges posed by the free-riders in the context of
public goods.
Solution and Explanation
Free-Riders and Public Goods
Free-riders are individuals who benefit from public goods without contributing to the cost of providing those goods. Since public goods are non-excludable, people can enjoy the benefits without paying for them, leading to a situation where some individuals take advantage of the goods without sharing the financial burden.
1. Challenges Posed by Free-Riders:
- Under-Provision of Public Goods:
Since free-riders do not contribute financially, there is often under-funding for public goods. If everyone relies on others to pay, the government may not have sufficient resources to provide these goods in the long term, reducing their availability and quality. - Inefficiency in the System:
The existence of free-riders creates an imbalance where some individuals benefit without contributing, leading to inefficiency. This may result in overuse of the good by non-payers, while contributors may feel their payments are unfairly used. - Difficulty in Collecting Funds:
Governments may face difficulty collecting necessary funds to provide public goods because beneficiaries may not willingly pay taxes or fees. The absence of a direct link between payment and consumption makes it hard to implement user fees or taxes effectively.
2. Solution to Free-Riders:
The government plays a crucial role in addressing the issue of free-riders by taxing individuals and businesses, ensuring that everyone contributes to the funding of public goods. This approach allows public goods to be shared fairly and ensures continued provision of essential services to the population.
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