economics of public sector
PUBLIC SECTOR
WHAT ARE PUBLIC GOODS, MERIT GOODS AND IMPURE PUBLIC GOODS? WHAT KIND OF A PROBLEM IS ASSOCIATED WITH THE PROVISION OF PUBLIC GOODS? WHAT ARE THE REMEDIES?
A public good is a good or service that can be consumed simultaneously by everyone and from which no one can be excluded—nonrival and nonexcludable. They are determined in terms of their economic rather than their administrative, physical, normative or financing charateristics. The market will fail to exist for public goods because they are:
Nonrival: Consumption by one person does not decrease the consumption opportunities of another person.
Nonexcludable: It is impossible or uneconomical to prevent someone from consuming the good once it is produced.
The market economy under-produces these goods because it is impossible to exclude non-payers from enjoying them.
Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good . This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.
Merit goods – goods or services (such as education and vaccination) provided free for the benefit of the entire society by the government. A merit good can be defined as good which would be under-consumed and under-produced in the free market economy. This is due to two main reasons: 1.When consumed, a merit good creates positive externalities. This means that there is a divergence between public and private benefit when a merit good is consumed. As consumers only take into account private benefits when consuming merit goods, it means that they are under-consumed (and so under-produced) 2. Individuals are myopic, they are short-term utility maximizers and so do not take into account long term benefits of consuming a merit good, and so they are under-consumed. The private sector
WHAT ARE PUBLIC GOODS, MERIT GOODS AND IMPURE PUBLIC GOODS? WHAT KIND OF A PROBLEM IS ASSOCIATED WITH THE PROVISION OF PUBLIC GOODS? WHAT ARE THE REMEDIES?
A public good is a good or service that can be consumed simultaneously by everyone and from which no one can be excluded—nonrival and nonexcludable. They are determined in terms of their economic rather than their administrative, physical, normative or financing charateristics. The market will fail to exist for public goods because they are:
Nonrival: Consumption by one person does not decrease the consumption opportunities of another person.
Nonexcludable: It is impossible or uneconomical to prevent someone from consuming the good once it is produced.
The market economy under-produces these goods because it is impossible to exclude non-payers from enjoying them.
Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good . This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.
Merit goods – goods or services (such as education and vaccination) provided free for the benefit of the entire society by the government. A merit good can be defined as good which would be under-consumed and under-produced in the free market economy. This is due to two main reasons: 1.When consumed, a merit good creates positive externalities. This means that there is a divergence between public and private benefit when a merit good is consumed. As consumers only take into account private benefits when consuming merit goods, it means that they are under-consumed (and so under-produced) 2. Individuals are myopic, they are short-term utility maximizers and so do not take into account long term benefits of consuming a merit good, and so they are under-consumed. The private sector