Section+Two+Questions

76. What are the distinguishing features of a ‘pure public good’?

“Pure public good” are goods that are not subject to exclusion and are subject to shared consumption; they demonstrate non-excludability and non-rivalry in consumption. Non-excludability simply means that even if you paid for a good, you can’t confine its use to yourself; this criterion raises the ‘free rider’ problem. Non-rivalry in consumption is illustrated when a consumption of a good does not reduce its availability to others. Some examples of a “pure public good” are national defense, flood control, street lights, air pollution, mosquito abatement, judicial and legal system, public TV, and uncongested roads. As one can notice from these examples, public goods are important things that are provided for every society despite the fact that they cannot be charged. This is because any good that is considered to be an obvious gain for the society will be desired and supplied somehow. The question of how such goods are supplied can be answered by taxation and public sector provision of the good; in short, “everybody pays since everybody benefits”. Public goods would not be provided in free or competitive market since there are very small or no private benefits. As a result, in virtually all countries, there is a degree of government supply of public goods. However, the quantity to provide is quite contentious as there is no market mechanism to gauge demand. Therefore, failure of optimal resource allocation is likely to occur and the society must make up for it.

89. Why is pollution an example of market failure? Use a diagram to illustrate your answer.

Market failure occurs when the price mechanism fails to take into account all the costs and/or benefits in providing and/or consuming the good, thus resulting resources that are not allocated to their most efficient use. Pollution is an example of market failure because it is a negative externality that causes a spillover cost, a cost imposed without compensation on third parties, and a depletion of resources. Pollution is caused by the law of conservation of matter and energy, population growth, rising per capita consumption, technological change, and the ‘tragedy of the commons’ and incentives. For example, pollution occurs when production of coal-powered electricity causes emissions of sulphur and nitrogen dioxide which lead to acid rain, killing natural resources. This negative externality occurred because the marginal social costs outweighed the marginal social benefits; the market underestimated the true costs of the good to society and produced too much of it. As a result, pollution is an example of market failure because there all costs and benefits have not been taken into account.





The graph above demonstrates negative externality, which in this case is pollution.