Question

Explain why the properties of “non-exclusiveness” and “nonrivalry” imply potential market failure. Give examples with respect to some environmental and/or natural resources of your choice.

Answer 1

A public good has two key features:

1. non-rivalry, its consumption by one person does not prevent consumption by another

2. non-excludability, ie it is impossible or too costly to prevent people who have not paid from consuming the good or service.

The positive externalities of these goods are so large that the free market might not produce them at all, because nobody would have an incentive to pay for them. Anybody who did pay for them would feel aggrieved that non-payers were able to enjoy the benefits from consuming the good without paying anything towards the cost of providing it (ie get a “free ride”). This is known as the free-rider problem. so there is possibilit of market failure due to the reason .  These goods are usually provided by the government who knows that private sector have no incentive to produce it and they will not get any benefits incurring the cost.

Examples include defence, policing, street lighting

Government intentions are sound but, properties of “non-exclusiveness” and “nonrivalry” imply potential market failure associated with a number of problems, including:

1. shortages and surpluses when price controls are used
2. problems caused by measurement difficulties and a lack of information
3. bureaucracy and inefficiency
4. a negative effect on incentives
5. the reduction in individual freedom of choice
6. the adverse effect on efficiency if there are frequent changes in government policy.