Question

A: What are the Three fundamental functions of the Public Sector in a marketcapitalist economy?

B: What is a market externality?

C: What are the 4 types of goods, based on rivalry in consumption and excludability?

D: What do we mean by asymmetric information?

Answer 1

A. The three fundamental functions of the public sector in a market economy are :

1. Minimalist Functions: These functions involve provision of essential public services such as Defence, law and Order, property rights, Macro economic Management and Public health. It also includes government intervention measures to promote equity in the economy such as Anti poverty programmes, disaster relief etc

2. Intermediate Functions: These Functions involves services which can solve market failures through measures such as environmental protection and likewise, regulating monopolies, Overcoming imperfect information in insurance, pension and financial industries, and providing social insurance.

3. Activist Functions: These functions involve market coordination through fostering markets and cluster initiatives and Asset redistribution policies.

B. Market Externality: An externality arises from an act of production or consumption, the effect of whichn is borne by an unrealted third party. The cost or benefit which occurs during the process of consumption or production does not get accounted for in the product production or pricing, which is why externalities causes market failures.

Externalities can be of two types Positive Externalities and Negative Externalities. In case of Positive externality the Marginal Social Benefit from the production or consumption will be greater than the marginal Private benefit. The example of such externality can be : governement's immunisation drive. If the government starts immunising individuals against certain contagious diseases, it will not only benefit the individual who is immunised but also all the people related to him, thus creating greater social benefit over private benefit.

Similarly in case of negative externality, the social cost of production and consumption will be greater than the private costs. For Example: The person whi smokes, not only create advers health conditions for himself but also the adversly impact the health of all the people around him ( passive smokers). Here the passive smokers are third party who have to pay an implicit cost of adverse health due to smoking by someone else. This this creates the problem of negative externality.

C. The four types of goods based on rivalry in consumption and excludability are:

• Private Goods: Private Goods are those goods which are Rival as well as excludable. It can be any good such as cars, house, book, etc. Since an individual pays a certain price for the consumption of the good, it makes the private goods excludable for others and gives the individual the sole authority to consume the goods. These goods are also rival in consumption because the purchase of a good makes its availability less for the others.
• Public Goods: Public goods are both non excludable and non rival in consumption. This is because since no one has to pay for accessing the public goods, no one can be excluded from consuming the good, also usage of public good by some individuals does not make it less available for the others to consume. Example: Defence Services.
• Common Resources: Unlike Public goods, the common resourcess though non excludable, are rival in consumption. These type of goods exhibit Tragedy of commons problem. The non excludability of the good makes people consumer more and more of the goods, but since greater amount of consumption by an individual reduces the availability of the goods for consumption by others, it imposes a social cost. Example: Water source having large quantities of fish.
• Club Goods: These type of goods exhibit excludability but low rivalry in consumption. Example of suh goods can be : Chargeable Public Parks. While the charges makes the park only accessible to certain people who can pay, it does not necessarily reduces the availability of the park for the others who can gain access to it.

D. Assymetric Information :

Assymetric Information happens when one party to the transaction has greater knowledge or information than the other party. Assymetric information leads to information failure. It can be either the seller or the buyer possessing greater knowledge than the other party. Assymetric Information can be good and bad. It is good when greater knowledge of the person instills confidence in the other about the reliability of the economic activity being transacted between them. For Example: greater knowledge and expertise of a doctor treating a patient, will automatically make the patient confident about the treatment being given by the doctor. But in some other cases, assymetric information can prove to be bad as well. For example: If a seller sells a second hand good to the buyer in the pretext of the good being new, the seller having knowledge about the condition of the product and the buyer being unaware of it, may put the buyer in greater risk and damages in the future.