Quiz 5: Difficult Cases for the Market, and the Role of Government

Business

The goods and services that have two distinguishing characters; that is, non-rivalry and non-excludability in consumption are called the public good. The non-rivalry means that the public good can be enjoyed by many consumers at a time; the availability of the good to one consumer does not decrease the availability of the goods to others. The non-excludability means that it is not possible for one consumer to exclude from consuming the public good. This non-excludability gives rise to the free rider problem of public good. The free rider problem arises when one enjoys the benefit of a good without paying for it. As it is impossible to exclude others from enjoying a public good, the people tend to use public good without paying for it. The free rider problem restricts the efficient allocation of resources. This is because as many tend to enjoy the good without paying for it, the potential consumers also tend to reluctant to make payments for the good. This decreases the incentive of the producers to produce such goods. Therefore, it is very important for the producers to exclude them who don't pay for the good as it will decrease the revenue and one to one relationship between payment and receipt to the producer.

The economic efficiency occurs when marginal benefit from an economic activity is equal to its marginal cost. The two criteria for economic efficiency are: 1. If an economic activity produces more benefit than its cost, then the activity is said to be economically efficient. 2. If an economic activity produces less benefit than its cost, then the activity is said to be economically inefficient. To produce an economic efficient outcome both of the above criteria has to be satisfied. Any activity that produces economic efficiency involves certain cost of achieving it. As more resources are devoted into an economic activity its cost is tend to increase than its benefit. Then as more resources are devoted into one activity it tends to increase economic inefficiency. Hence, it will be economically inefficient to devote more resources to completely prevent future attacks. The resources should be devoted to the extent that the marginal benefit from the activity is equal to its marginal cost.

The goods and services that have two distinguishing characters; that is, non-rivalry and non-excludability in consumption are called the public good. The non-rivalry means that the public good can be enjoyed by many consumers at a time; the availability of the good to one consumer does not decrease the availability of the goods to others. The non-excludability means that it is not possible for one consumer to exclude from consuming the public good. This non-excludability gives rise to the free rider problem of public good. The two examples of public goods are; 1. Roads, bridges etc. 2. Public parks. The free rider problem arises when one enjoys the benefit of a good without paying for it. As it is impossible to exclude others from enjoying a public good, the people tend to use public good without paying for it. The free rider problem restricts the efficient allocation of resources. This is because as many tend to enjoy the good without paying for it, the potential consumers also tend to reluctant to make payments for the good. This decreases the incentive of the producers to produce such goods. Therefore, the market tends to under supply these goods and distorts the efficient allocation of these goods.

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