Question

Question 1

a. Distinguish the difference between public and private goods and explain how the conditions of efficient output are determined for public goods.

b. “Education is a service that has some characteristics of a public good while at the same time having characteristics of a private good.” Explain

Question 2

Explain the meaning of externalities and show how market equilibrium is established under negative externalities. You may use graph to illustrate your answer.

Question 3

a. If the government of Bahrain feels that traffic is responsible for pollution and decided to use taxes to correct market failure. Explain how the government uses taxes to reduce pollution.

b. What are the implications of the free rider problem to government financing?

Answer 1

1. a) Public goods are those goods which are provided by the government or by nature. These goods are free for use of the public in general. All the people are treated equally for using a public good. eg. street lights, dams, sunlight, river, etc. On the other hand, private goods are those goods which are manufactured by private companies for fulfilling the needs of the customers. These goods are sold for some consideration. These are generally manufactured by enterprises. eg: clothes, electronic appliances, etc.

b) Education posses some characteristics of public goods as in some countries the government has made free and compulsory education up to the age of 14. The children will get all the facilities of getting free and compulsory education. But when we talk about higher education the students have to pay fees for getting an education. The higher the education more amount of fees is required. So, the people who are not wealthy enough to pay the fees of higher education are not able to get an education until and unless they get some scholarship for getting an education. So, Education is a service that has some characteristics of public good while at the same time having characteristics of a private good.

2. An externality can be understood as benefit or cost which is produced by a producer but the producer has not received nor financially received by that producer. It can also be understood as the effect on an external party by the process of exchange is termed as an externality. The market externality affects the outside party which is not involved in the exchange process. A negative externality occurs when the production is increased as the producer does not have to bear all the costs incurred for production. When there is a negative externality the cost of the goods produced will be higher which will result in lowering the production of the goods and thus an efficient equilibrium is achieved.

3. a) The government can impose taxes which is generally termed as "Green taxes" which are exercise taxes in general for cubing the pollution. They can impose taxes on those producers who are responsible for generating the pollution or on the sources which use the environmental pollutants will help in limiting the use of such vehicles which will help in reducing the pollution.

b) A free-riding problem is a situation that represents a market failure. These arise with those products which are used again and again but the producers are not getting compensation for the repetitive usage of the product or services. It is a problem for government financing as the repeated use of the service does not generate any revenue which affects the reserve of the government. The government can impose taxes so that this situation can be handled.