Question

Q1(using graph(s) and words )Use the economic theories to determine whether the statement in each of the following question is True, False or Uncertain. Please explain using both words and graph(s) and make it concise. Your answer should be around ¾ to 1 page for the question.

Consider a dam which provides drinking water for a local community and which allows free access to all. As a public good the only way to manage this resource is through government regulation so that overuse does not occur.

Answer 1

A public good is a good which is mostly provided by the government free of cost to the general public. But a good to be called Public good must possess to main characteristics i.e the Non-rivelary and Non-exclusion.

Now, Consider a dam which provides drinking water for a local community and which allows free access to all. Since there is free access to all, the criteria of Non-exclusion works which gives rise to free rider problem.

So in order to eliminate the problem of free rider and ensure the efficient utilization of the public good, government regulation is needed in order to ensure no overuse occur.

This can be seen graphically as shown below, when there is free access to a public good, it causes overuse of the good and hence the marginal social cost (MSC) is above the supply curve and hence government regulation is needed to prevent this overuse.

Government can regulate this by following means:

• By regulating the amount of water per person.
• Imposing a tax on use of water above a certain level.
• Create a system of tradable licence for rights to use water, specially for industrial uses.

These all will either decrease the MSC incurring to the society or will generate revenue to counter them and hence overuse will be prevented and efficient provision will be ensured.