Question

5. Discuss the nature of public goods, both pure and impure, and detail how government might become involved in their provision. Discuss how consumption of the good might be rationed to consumers.

Answer 1

Public goods are the satisfy non-excludibility and non-rivalrousness. Non-excludibility means that no person can be excluded from consumption of the good. Non-rivalrousness means that consumption of good by one person reduce the good available to someone else.

* Pure public goods which are perfectly non-excludable and non-rivalrous. For example, national defence. No person can be excluded from being protected by national defence. Also, a person being protected by defence doesn't reduce the amount of protection for someone else. Thus, it is purely public good.

In case of pure public good, private markets would not provide such goods because no person can be excluded to use the good in case of no payment. Thus, government comes in the market and try to fix this market failure. The government does cost-benefit analysis and the optimal quantity of good is decided where Marginal Cost= Marginal benefit. In case of pure public good, consumption is not usually rationed.

* Impure public good are goods which satisfy both the attributes of non-excludibility and non-rivalrousness but not completely /perfectly. Examples of impure public goods are club goods, merit /demerit goods and common resources.

In case of impure public goods, there might underprovision of good (for example, education, health) by private markets. The problems of free rider are also relevant for these goods. Thus, government interfere in the markets to correct for these market distortions. It can either provide it completely, finance it, regulate the private market, etc.

The government rations many impure goods. For example, in case of education, rationing is by providing scholarships to high merit students.