Suzannah and Rahil What is the problem with their business idea?

1. to be able to explain how market failure leads to state provision of public goods Suzannah and Rahil What is the problem with their business idea?

2. to be able to explain how market failure leads to state provision of public goods Market Failure – public goods [not to be confused with merit goods]

3. to be able to explain how market failure leads to state provision of public goods Market Failure • Definition: • Where the market mechanism fails to allocate resources efficiently

4. to be able to explain how market failure leads to state provision of public goods Market Failure Public Goods Markets would not provide such goods and services at all!

5. to be able to explain how market failure leads to state provision of public goods Mr. Green pays for the street light but Mr. Brown opts not to pay. Mr. Green cannot stop Mr. Brown, Mr. Blue, Mr. Black, Mr. White from enjoying the benefits of this good.Mr Brown will be a ‘free rider’. [so will Mr. Blue…etc] Imagine a street with five houses

6. to be able to explain how market failure leads to state provision of public goods In groups of 4…. • Four players – each start with £20 • Each individual has to decide [independently] how much to invest in a common pool of cash [write it down] • After the investments have been made the common pool will be doubled and distributed equally

7. to be able to explain how market failure leads to state provision of public goods • If everyone puts in £20 then all double their money • But a selfish player might contribute nothing hoping that others contribute because s/he will get 25% of the ‘pot’ [s/he will be a free rider]

8. to be able to explain how market failure leads to state provision of public goods Public goods – the free rider problem The free rider problem means that a rational consumer will let someone else pay for the provision of the good/service. As a consequence, no-one will be prepared to pay for it – there will be no demand curve.

9. Examples: 1. Street lighting 2. Lighthouse Protection 3. Police services 4. Air defence systems 5. Roads / motorways 6. Terrestrial television 7. Flood defence systems 8. Public parks & beaches Why non-excludable? to be able to explain how market failure leads to state provision of public goods Public Goods

10. to be able to explain how market failure leads to state provision of public goods Public goods • Non-excludability – Person paying for the benefit cannot prevent anyone else from also benefiting - the ‘free rider’ problem • where the consumption of a good or service by one person will not prevent others from enjoying it A non-excludable good Would you pay for this?

11. to be able to explain how market failure leads to state provision of public goods Public Goods Because of their nature, the private sector is unlikely to be willing and able to provide public goods. The government therefore provides them for collective consumptionand finances them through general taxation

12. to be able to explain how market failure leads to state provision of public goods Market Failure • Definition: • Where the market mechanism fails to allocate resources efficiently

13. to be able to explain how market failure leads to state provision of public goods • The problem with co-operative behaviour is that although it makes everyone better off there is always the possibility [probability?] that a free rider will take a greater share of the benefits and make the co-operative behaviour logically not worthwhile.

14. to be able to explain how market failure leads to state provision of public goods • The problem with co-operative behaviour is that although it makes everyone better off there is always the possibility [probability?] that a free rider will take a greater share of the benefits and make the co-operative behaviour logically not worthwhile. • This would be an argument for government intervention forcing the co-operative behaviour i.e. by levying taxes and spending the money to provide the public goods

15. to be able to explain how market failure leads to state provision of public goods In the words of Adam Smith… One of the duties of government is…”erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”