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micro

Market failure and public goods

1 min read · 3 sections · 3 diagrams

public goods

  • non-rivalrous
    • consumption by one person does not reduce the availability for someone else
  • non-excludable
    • it is not possible to exclude someone from using the good, even if the person does not pay for it
  • eg. national defense, lighthouse

Free-rider problem

  • people could not be prevented from using it even though they would not pay for it, for a public good
  • no profit-maximizing private firms would be willing to produce a good it cannot sell at some price
    • as a result, the market fails to produce goods that are non-excludable, giving rise to resource misallocation, as no resources are allocated to the production of public goods
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  • The free rider problem occurs when individuals benefit from a public good without paying for it, because public goods are non-excludable and non-rivalrous. Since people can enjoy the good regardless of whether they contribute, many choose not to pay and instead “free ride” on others’ contributions. As a result, the public good is under-provided or not provided at all, even though everyone would benefit if all contributed.

Government intervention to correct the market’s failure to provide public goods

  • Direct government provision
    • occurs when the government directly supplies certain goods or services to the public
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  • Contracting out（外包）
    • occurs when the government pays a specialist private producer with the expertise（专业技能） to produce public good
      • 在 contracting out（外包） 的过程中，政府通常会通过 competitive tendering（竞争性招标），并倾向于选择报价最低、同时满足基本质量标准的 firm。
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