The Economics, Business & Enterprise Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business and Enterprise

A/AS Level Economics Market failure Resource 5 Public Good

Letter to a problem page

Dear problem page solver My husband and I both work and in theory have agreed to split the house work 50 / 50. However it takes him so long to get started and as I cant stand it when the house is dirty I always end up doing his half as well. Please advise. Answer You have my sympathy and I have passed you letter on to my good and useful friend who is an economist. He writes: This is a classic case of a clean house being a public good to you and your husband. You see a clean house is non excludable, it is impossible for you to benefit without your husband enjoying a clean house as well. It is also nonrejectable, which means he cant opt out and decide not to benefit (although I suppose he might not notice that it is clean!) Finally there is non rivalry which means that you enjoying a clean house doesnt leave less for him to enjoy. So as usual it is all about incentives. At the moment he has no incentive for getting the vacuum cleaner out because he thinks you will. The solution would be to pay him to do his half or to exchange jobs with something that he is more particular about than you, possibly a clean car or an ironed shirt .

EBEA | 2008 |

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The Economics, Business & Enterprise Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business and Enterprise

Public Good Briefing Sheet 1. What is a public good? A good or service, that may be consumed by more than 1 person at a time and from which everybody can benefit e.g. streetlights This leads to the free rider problem If I can still receive it without paying there is no incentive to contribute. Public goods have 3 features: NON-EXCLUDABILITY Impossible to consume without others enjoying the benefits NON-RIVALRY One person consuming it does not leave less for everybody else. NON-REJECTABLE Cannot choose not to consume it. 2. Where is the market failure? Insufficient resources are put to a socially valued output, resulting in inadequate provision which reduces welfare: e.g. fewer street lamps is likely to increase the number of accidents and, possibly, crime. 3. How is the market failure corrected? The government provides it free to all and fund it from general taxation. 4. How well is this market failure corrected? It doesnt know what the optimum level is and so may deliver too much. The governments aim is to provide a service, without reference to profit and in absence of competition likely to lead to some inefficiency. 5. Is it a fair assumption that people only ever act in their own self interest? No it is not necessarily appropriate for example many charities are financed entirely by voluntary contributions.

EBEA | 2008 |

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The Economics, Business & Enterprise Association

The Professional Subject Association for Teachers and Lecturers of Economics, Business and Enterprise

6. Some services now provided by state on the basis that they are public goods used to be provided by the private sector. Plaques on old buildings are fire insurance plates. Householders and shop- keepers would pay insurance. In the event of fire, firemen would check that the owner was up to date with his insurance premium before turning on the hoses. Why might state provision better? 1. Fire spreads rapidly. Why wait until an insured building becomes on fire first? 2. The quality of service is likely to improved because the focus has changed from making a profit to providing a service. 3. Economies of scale: one national service is better than many small ones.

EBEA | 2008 |

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