Question

Explain how market failures such as externalities might justify economic functions of government

Distinguish between private goods and public goods and explain the nature of the free-rider problem

Discuss the central elements of the theory of public choice

Answer 1

ANSWER:

1)Generally, market failure is a sort of situation in which the unrestrained market economy leads to very few or too many resources that are going to be a specfic economic activity. For example, Market failure occurs as a steel mill doesn't pay for the clean air. costs of producton have external cost to others. For suppose if the production cost is lower, hence more steeel is generated than required or else be the case.

Also externalities are the best example of the market failure. These externalities takes place when an economic activity creates external costs to the third parties. And Externalities can be either positive or negative. Pollution is best example for the negative externality. Normally, the government can correct these sort of negative externalities by imposing several special taxes.

The other economic functions of the government includes: Providing a legal system, Enforcing the contracts, Defining and protecting the property rights.

2) The private goods are the goods that are rival in consumption and also excludable. Rival in nature indicates if one person consumes the private good then he reduce if for another person, and excludability means those don't pay for the private good can be excluded. Whereas, the public goods are the goods that are nonrival in the consumption and also non-excludable for instance, Defence.

The free rider problem also takes place when people takes advantage of being able to use a common resource or a collecitve good without paying for it. It is an instance of the market failure. For suppose if there are 2 people in a room and if one person buys TV then there is an incentive for other person not to contribute to the TV's cost which clearly indicates that a person is free riding.