1. The text says that both non-rival and non-excludable public goods involve externalities.
a. Are the externalities associated with nor-rival public goods generally positive or
negative? Use examples in your answer. Is the free-market quantity of nor-rival public
goods generally greater or less than the efficient quantity?
b. Are the externalities associated with non-excludable generally positive or negative?
Use examples in your answer. Is the free-market use of non-excludable public goods
generally greater or less than the efficient use?
2. When the production of all goods and services is left to private markets, there is a
tendency to produce too much of some goods and insufficient amount of other goods. In
extreme cases certain goods will not be provided at all.
a. Clearly illustrate how does the policy of laissez faire cause markets to fail.
b. To what extent and how should the government intervene in the production of goods
and services?
c. In light of the Coase theorem, government intervention is probably not needed to solve
1a. The externalities associated with non-rival public goods can be either positive or negative, depending on the specific good in question. In general, positive externalities arise when the consumption or provision of a non-rival public good benefits others who did not contribute to its production. For example, a fireworks display in a city park is non-rival, as one person's enjoyment of the fireworks does not diminish others' enjoyment. However, the positive externality occurs because people who did not contribute to the cost of the fireworks display still get to enjoy it. On the other hand, negative externalities can also exist for non-rival public goods. For instance, if the park where the fireworks are held becomes overcrowded, the negative externality may arise from congestion, noise, and pollution.
The free-market quantity of non-rival public goods is generally less than the efficient quantity because people can take advantage of these goods without paying for them. Since there is no direct incentive for individuals to contribute, the market cannot ensure that an efficient quantity of the good is provided. This is known as the free-rider problem.
b. The externalities associated with non-excludable public goods are generally positive. Non-excludable public goods are those that are available to everyone and cannot be easily restricted to certain individuals. Positive externalities arise because the use or provision of these goods benefits others in society. A classic example is street lighting. When streetlights are provided, they benefit everyone by enhancing safety and convenience.
The free-market use of non-excludable public goods is generally less than the efficient use due to the free-rider problem. Since individuals can enjoy the benefits of the good without having to pay for it, there is no market mechanism to ensure the provision of an efficient quantity.
2a. The policy of laissez-faire, which refers to minimal government intervention in the economy, can cause market failures in several ways. One way is through the existence of externalities, where the costs or benefits associated with the production or consumption of goods and services are not fully accounted for by market prices. This leads to an overproduction or underproduction of certain goods and services. For example, businesses that emit pollution may not fully bear the costs of the damage caused to the environment or public health, resulting in excessive pollution.
Another way laissez-faire can lead to market failure is through the presence of market power. In some industries, a few dominant firms may have the ability to control prices or restrict competition, leading to inefficient outcomes. For instance, if a pharmaceutical company has a monopoly on a life-saving drug, they may set a high price that prevents many people from accessing it, resulting in insufficient provision.
b. The extent and manner of government intervention in the production of goods and services depend on various factors, such as the nature of the market failure, the potential costs and benefits of intervention, and the societal values and preferences. In general, government intervention is justified when market failures occur, and there is potential for the government to improve outcomes.
Government intervention can take various forms, such as regulations, taxes, subsidies, or provision of goods and services. For example, to address externalities caused by pollution, the government can impose emission standards on industries or introduce a tax on pollution. This internalizes the cost of pollution and incentivizes firms to reduce their emissions.
c. The Coase theorem suggests that government intervention may not be necessary when property rights are well-defined, and transaction costs are low. According to the Coase theorem, if property rights are assigned and individuals can negotiate and trade those rights without significant costs, then they will be able to reach efficient outcomes even in the presence of externalities.
However, it is important to note that the Coase theorem relies on several assumptions that may not always hold in practice, such as perfect information, no transaction costs, and no bargaining power imbalances. In many cases, government intervention may still be required to address market failures effectively. The decision on whether government intervention is needed depends on the specific circumstances and the feasibility of overcoming market failures through voluntary agreements.