2.Explain fully why the private sector of a free enterprise economy cannot produce public goods such...

2.Explain fully why the private sector of a free enterprise economy cannot produce public goods such as lighthouses.

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Ans:-

Public goods have two common and central characteristics: 1) nonexcludability, which means it is not possible to separate the users from the non-users and 2) non-rivalry of consumption, which means consumption by one person does not reduce the available amount for consumption for others. Now, lighthouse satisfies both the conditions. We cannot separate the ships which uses the lighthouse for navigation and which does not use it for navigation. Therefore, it is difficult to charge a price as users cannot be separated from non-users. Also, if one ship uses lighthouse for navigation, it does not make the lighthouse less available for consumption for others. Therefore, how to decide how much price should be charged to the users? Private enterprises are run by profit motives, therefore, they should be able to exclude the users from the non-users to charge a price to the users. Also, in order to determine the price, the goods should be a rival good. Private enterprises will face the 'free-rider' problem if it wants to produce public goods, such as lighthouse. Everyone would like to use the service and none would like to pay for it. This will violate the profit motive principle of the private enterprises.

Rahul Sunny answered 2 years ago

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