In this article, the focus is on mastering market failure concepts, particularly in relation to public goods. Students can follow a 3I framework to understanding how to revise for Public Goods.
JC Econs Tuition: Public Goods in Market Failure (Identification and Implications)
The first “I” in the revision tip stands for identification. It is essential to recognize that public goods are non-rivalrous, non-excludable, and non-rejectable in nature. Being able to provide precise definitions of each concept is important. Moving on to the second “I,” the implications of these features are explored. Non-rivalry results in marginal cost (MC) being zero for allocative efficiency, requiring price (P) to be zero as well. However, this poses challenges as producers aim for profits, ultimately leading to loss of allocative efficiency. Non-excludability gives rise to free ridership problems, loss of effective demand, and a missing market signal.
Intervention
The final “I” delves into the government’s intervention strategies. Given the identified problems, government intervention becomes necessary. For non-rivalry, free provision is required to achieve allocative efficiency, while non-excludability necessitates direct or government provision. Hence, public goods often require government intervention for free provision.
The Fourth “I”
To truly excel in understanding this section, we can consider another special tip – considering the INTENT behind providing a public good. Through illustrative examples such as street lighting and public gardens like Singapore’s Botanic Gardens, the importance of understanding the original intent becomes apparent. Some students wonder why street lighting is not non-rivalrous, since reading the papers under a lamp post deprives another person of the same spot. However, street lighting serves the purpose of illuminating roads to prevent accidents (and not reading corners to promote national literacy), thus the argument does not hold true. Likewise, if one thinks of the Botanics as a picnic or exercise spot, the good is rivalrous in nature. However, when thinking of the gardens serving as the lungs of Singapore’s ecosystem (thus cleaning up the air), this is essentially non-rivalrous in nature. This highlights the importance of considering the primary objective of a public good. This critical thinking approach helps clarify misconceptions especially when tackling new examples of public goods.
JC Econs Tuition: Public Goods in Market Failure
In conclusion, mastering market failure concepts, particularly in understanding public goods, requires a thorough grasp of their characteristics, implications, and government intervention strategies. By incorporating the special tip of analysing the original intent, students can enhance their comprehension and application of economic principles effectively. More notes are available under this link to help students strength their application skills.