AN ASSIGNMENT

ON
PUBLIC ECONOMICS
HE-204: Public Economics
Submitted To,
Farah Ishaq
Assistant Professor
Institute of Health Economics

University of Dhaka

Submitted By,
Sobuj Alom
ID:17
Session: 2018-2019
2nd Year, 3rd Semester
 Answer to the question no 1:
Market failure is the economic situation defined by an inefficient distribution of
goods and services in the free market .In market failure, the individual incentives for
rational behavior do not lead to rational outcomes for the group. In other words,
each individual makes the correct decision for him or herself, those prove to the
wrong decision for the group .Market failure occurs individual acting in rational self
interest produce a less than optimal or economically inefficient outcome.

C. National defense

National defense is one such public goods because each citizen receives similar
benefit regardless of how much they pay .It is very difficult to privately produce the
optimal amount of national defense .since government cannot use a competitive
price system to determine the correct level of national defense ,they also face major
difficulty producing the optimal amount. It is a public goods ,the fact is that
consumption of the good by one person cannot reduce the amount available for
others to consume.Therefor all citizen in a country have to consume same amount of
national defense.Public goods are accessible ,freely to all members of a given public
and each benefit from it without paying for it .There is therefore no way to exclude a
person from accessed to such a good if it is produce at all.Now,if all can have it
without contributing to its cost ,then no person will contribute and the good will not
be produced .This is a form of market failure because of its supply and demand does
not depend on the market forces that requires taxation to overcome it.

E.Medicare (medical care for the aged)

The individual market premiums rise steeply with age in most states. Cost are likely
to unaffordable for most uninsured older adults ,even with large tax credits or in
states with community rating.The findings show clearly the need to include risk and
age pooling to reach the uninsured in old age .The insurance company have to bear
the large burden of high medical bill because the old fellow require the high
maintenance .Their health is always unstable and the insurance companies have to
specify their service to consumers .These issues are likely to see the packages offered
by insurance companies rise therefore lead to a possible market failure in medical
care for the aged.

Government prohibition of the use of narcotics

There is often incomplete information that has to make the job complete in the
prohibition of the use of narcotics. This make any attempts by the governments in
this step irrelevant an waste of resources .So much money is spent and outcome is
less relevant because the major individual involved are never easily caught up with.
The narcotics continue to flow as usual and the practice of curbing fails.

Answer to the question no-4(a)

For completing answer we will draw a graph from the given direction and then
explain the question.

P, c, R

Pm Supernormal profit

Subsidy
D

A AC
C
B
MC
Pe

0 Output
Qm Qe

AR

MR
Figure-Natural Monopoly
If the firm charge a price equal to the marginal cost ,it will suffer a loss ,because marginal
cost is lower than average cost .In this situation ,The government can provide subsidy to the
industry and insist that the firm charge a price equal to the marginal cost .To achive
alllocative efficiency ,the regulator will have to impose an accesive price.Allocative is
achived when AR equal to MC,but at this price ,the natural monopoly makes a loss.

Answer to the question no-4(b)

For completing answer we will draw a graph from the given direction and then
explain the question.

P,c,R

AC
MC

A
Pm

B
Pe

DWL

Output
0
Qm Qe

AR
MR

Figure: Natural monopoly

A monopoly firm produce an output that is less than the efficient level .Because the
monopolist sets marginal revenue equal to marginal cost to determine its output
level .it will produce less than the socially efficient quantity of output .The price that
a monopolist charge also above marginal cost .The monopoly pricing creates a
deadweight loss because the firm forgone transaction with the consumer
.Monopolies can become inefficient and less innovative over time because they do
not have to complete with other producer in a market place .In the case of
monopolies ,abuse of power can lead to market failure.