Question

Q3. Commercial radio stations are private firms that produce and broadcast programs without assistance from the government.

a) What type of good is a radio program? Explain your answers with reference to the categories: public good, private good, club good and common resources.

b) Explain why commercial radio stations may not produce programs that maximise welfare.

c) Explain how adding a government-funded radio station to the market can increase welfare.

d) Suppose that the government requires the government-funded radio station to cover a part of its operating costs from advertising for revenue. Would this change your answers to part c)?

Answer 1

A. A commercial radio program is a type of Public Good. Public goods are defined as goods that are non-excludable (that is, no one can be stopped from using them) and non-rival (that is, usage by one person doesn't make the good any less available to any other). Commercial radio broadcast fulfill both of these requirements and hence, are Public goods.

B. While commercial radio stations do not charge anything from the listener, they nevertheless need revenue to run. And this revenue they get from advertising. People who buy the product post listening to the advertisement are indirectly paying for the broadcast. This means that as a public good, commercial radio broadcast are not maximizing welfare. The advertisements also take up time on broadcast- reducing welfare.

C. A government funded radio station would not need advertisements to run, thus no indirect costs or time given to advertisements, hence it would increase welfare.

D. Since the radio station will only cover a part of its operations from advertisements, unlike a commercial station which would recoup all of its costs from advertisements, it will still increase welfare as compared to the commercial radio station. Though the welfare would now be less than as compared to in part C.