Question

Discuss why market fails to allocate public goods, efficiently. Also, critically discuss if market mechanism is best suited to allocate common goods?

Answer 1

Market failure & Public Goods
Market failure refers to the economic situation where the distribution of goods and services in the free market is inefficient. Individual decisions will not help the group or as an economy to the level where the goods should be produced and distributed. Public goods are better example to define the market failure in an economy.
Public goods have some characteristics and needs that private markets may fail to meet. Non-excludability of consumption refers to the ability of each and every individual to consume public good even without paying for that. Free-rider problems occur where private markets fails since they cannot estimate the utility or demand from consuming private goods and earn profit from producing or selling that. Non- rival consumption make the process hard to derive the demand where it is not easy to find who all benefits from the consumption and who all not. Street light is an example of public good. The inability to estimate the demand and utility of the goods makes public good inefficient in the market and leading to failure. The government fixes a level where the goods must be produced and distributed to cop up with the welfare of people from consuming public goods.
Common goods include air, water which are rival and non excludable in consumption. The unit of a good consumed by one could not be consumed by others. Also, it demands for non-excludability which refers no one should be excluded from the consumption of the common goods. A common goods market has a problem of excludability even the good feature is different. Markets find it inefficient to consider the characteristics of non excludability. It may price than the optimal level which makes the consumers not to consume common goods. Thus market mechanism fails to allocate common goods efficiently that could include every consumers in the consumption of common goods.