Question 1

a) which are the two characteristics of the public goods consumption and
which is the main problem in supplying this type of goods by the
government?
Public goods are services provided by the government whose benefits
extend to a group of individuals or the society as a whole. There are two different
types of public goods. These include pure public goods and impure public goods.
Several member of the society can consume pure public goods without diminishing
in value to any individual by using particular services. The street signs are one of
such examples, as they will not wear out even if large numbers of people are
watching it. It would be extremely difficult to limit its use to one person or
preventing other from looking at it. These goods are therefore non-profitable to be
provided privately. The interest in these types of public goods can be traced back to
classical economics : David Hume and Adam Smith agreed that government
intervention is needed to supply goods and services characterized by collective
benefits. If left to individuals or organisations, these goods would not be provided
adequately.
Public goods have two main characteristics that distinguish it from a private
good. Pure public goods are non-rival in consumption and non-excludable. Pure
public goods, consumption of which is non-rival if a person can increase its
consumption without reducing the quantity available for others consumption,
when they are provided to the individuals. If a private good is freely provided,there
is likely to appear a overconsumption of the good since the individuals does not
have to pay for the good provided.So we can consider here the fact that the demand
might be until the point where the marginal benefit of the good will be zero. As a
principle stated by Sameulson,one individuals consumption does not reduce the
others consumption :It implies that marginal cost of extending the service to
additional individual user is zero . For example a non-rival good is terrestrial TV,
Radio station and fireworks. Many people can consume those goods without
paying for them, as marginal cost of extending the service is zero, as one persons
consumption does not diminish the use by other people.
The second characteristic is non-excludability. The non-excludability of
goods is where no one can prevent other person from the consumption of the goods
because it might be expensive or impossible. For Example NHS service and civil

defence in United Kingdom is considered to be a public service being nonexcludable. Because when government spend money on civil defence it brings
protection and safety to the society or individual regardless of their contribution or
non-contributions to the country. As they are non-excludable therefore entry fee
cannot be charged. These are provided free and to exclude individuals would be
very costly and impossible to stop once it has been provided.
Although, the author pointed out that there is a free-rider problem
associated with public goods, even before the time of Adam Smiths writings. Each
citizen who can enjoy the benefit of a public good has an incentive to try to lay the
whole burden of provision on others, whenever the exclusion of non-payers is very
costly or impossible.
The provision of pure public goods by so-called public sector is itself
subject to government failures as externalities and public goods are often linked
due to non-excludability factor that is a prominent feature of public goods. Pure
public goods are seen as an extreme form of externality and have problems of
efficiency in allocation of resources.
Free riding refers to a problem where under production of goods or
services provided by the public sector lead to Pareto inefficiency or where there is
an excessive use of the public goods. It is relevant in the case where nonexcludability and non-rivalry in consumption of public good by the consumer will
establish the consumption of the goods without contributing towards its
production. This leads to underproduction of public goods and gives rise to free
riding. Potential users may wait for the good to be supplied and then consume the
good for free. For example NHS is non-rivalry in consumption and non-excludable
as non-payers can take a free ride and enjoy the benefits of consumption (free
riders). This creates market failure as smaller amount of money is being
regenerated into the health service. Thus there is less money for the government to
invest into the health services. This results in hospitals having out dated equipment,
decrease in hospital beds and cuts in hospital jobs.To solve this issue government
might collect taxes for the provision of public goods and the problem might
disappear by further restricting the deals with free rider problem .
Another issue that may arise here is the fact that people can give false
information about their taste as consumer might be hoping to bring about a nonPareto optimal equilibrium that gives them higher utility. That is caused by lack of
information as observed by Stiglitz. This can lead to excessive supply of funds and

inefficiently allocation of the goods as most public goods and services are financed
through a process of taxation, having no choice. Optimal levels of expenditures are
difficult to be established. The provision of public goods can easily be overfinanced or under-financed.

b) Is education a public good? Is defence a public good? Explain your

answer

In order to classify each of the following as a public or private good, the

term public good must first be defined. A public good is a good possessing two
characteristics: a) Once the good is provided it is difficult to exclude or prevent
others from consuming the good, even if they do not pay for it. b) Consumption of
the good by one individual does not reduce the amount available for others to
consume. Given these characteristics the above goods can be classified.
Education is a publicly provided private good in the sense that there is a
large marginal cost associated with supplying additional individuals. It is a good
that satisfy one, but not both characteristics of a public good. Such goods are
sometimes referred to as "mixed" goods. It is obvious that it is possible to exclude
individuals from consuming education. Every year there are numerous students
who do not attend any type of education simply because they cannot afford it.
However, once the good is provided, consumption by one individual does not (at
least up to a point) affect the quantity that would be available for another
individual to consume. For example, when one individual listen to a lecture on the
economics of drug abuse, this consumption does not affect the quantity of the
lecture available for others to consume. Education is not a pure public good. It is
clearly possible to exclude people who do not pay. What people who call education
a public good mean is that there are positive externalitiesnot all of the benefits
accrue to the students. Society benefits when more people go to college. People
with a college education earn more than others, but their higher earnings do not
reflect the whole of their contribution. Others who work with them earn higher
wages because of the added flexibility, innovation, and productivity of the labor
force. People with a college education tend to be more active citizens, with their

volunteering and other activities benefiting those around them. There are more new
products and services for all of us to enjoy because of the contributions of college
graduates. So the benefits of higher education are shared by the participants and
the rest of society. Athough education is not a pure public good it often receive a
great deal of support from government. This occurs because some people feel that
an education offers benefits not only to the individual who consumes it, but also to
society as a whole. It is felt that without government support, the good would be
consumed and society would be made worse off. A second reason for such support
is found in the philosophy that individuals should not be denied an education
simply because they cannot afford to purchase it.
A pure public good is a public good where the marginal costs of providing
it to an additional person are strictly zero and where it is impossible to exclude
people from receiving the goods.National defence is one of the few examples of a
pure public good. It is in many ways a public, or collective good, which means
two things. First, consumption of the good by one person does not reduce the
amount available for others to consume. Thus, all people in a nation must
consume the same amount of national defence (the defence policies implemented
by the government), although different people may value that common defence
policy differently. Second, the benefits that a given person derives from the
provision of a collective good do not depend on that individuals contribution to
funding it. Everyone benefits, including those who pay little or no taxes. To the
extent one person in a geographic area is defended from foreign attack or invasion,
other people in that same area are likely defended also. This makes it hard to
charge people for defence, which means that defence faces the classic free-rider
problem. Indeed, as I mention it earlier, almost all economists are convinced that
the only way to provide a sufficient level of defence is to have government do it
and fund defence with taxes.