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Economics Policy Public Goods - Essay Example

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This paper explores three related questions about price-excludable public goods, or merit goods. All the three questions are explained in detail and the second question is carefully explained through a diagram of marginal social and private benefit.
Education is a mixed good, which is non-rivalrous in nature, but can be excluded by setting a price…
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Economics Policy Public Goods
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Economic Policy: Public Goods Faizan Rahman This paper explores three related questions about price-excludable public goods, or merit goods. All the three questions are explained in detail and the second question is carefully explained through a diagram of marginal social and private benefit.
Question A: If a price-excludable public good, like education, is provided only by the private market, will there be an optimal amount that will be provided Why or why not
Education is a mixed good, which is non-rivalrous in nature, but can be excluded by setting a price. These types of goods can be provided by both the private and public sector. Consumption of education would not reduce the amount of education available to other users. However, it can be excludable because only those paying for it can get access to it. Education can also be called a merit good. If education is provided by the private market alone, it would result in imbalance, and hence, the market mechanism would not be able to match demand and supply. The reason for this is the fact that private forces are not concerned with the public interest; they are concerned about their own returns and nominal benefit. Therefore, the private market forces will only produce those goods which would lead to maximum profits. The private market forces ignore social costs and benefits, and therefore, will not produce the optimal quantity of merit or price-excludable public goods.
Question B: Will education be over produced or under produced Explain briefly.
Education would be under-produced by the private sector. All merit goods are considered good for the people, and the government desires to provide them in abundance. Merit goods have more social benefit than private benefit. Therefore, the private sector would not provide them optimally. Education has large external benefits relative to private benefits, that is, social benefits are greater than private benefits. Under the price mechanism, there would be few firms willing to provide education, and they would charge high prices. High prices would reduce consumption because some or many people might not be able to afford education. On the other hand, de-merit goods are those goods which are harmful for the people, and the government wants to limit their supply. Since these goods are in high demand, the private market would over produce them. De-merit goods have more social cost relative to private cost. In short, the private market would under produce merit goods and over produce de-merit goods (n.d.).
Question C: If a price excludable public good is not provided optimally, how can optimally be established
Since the private market does not provide appropriate quantities of merit and de-merit goods, government intervention becomes necessary. It is argued that if the individual is left to decide whether or not to pay for these goods, some would choose not to or may not be able to. There are several ways in which the government can control consumption of price-excludable public goods. Furthermore, the government can provide subsidies to private firms to supply these products at a lower price. Also, many people argue that the government can provide these goods for free to the general public by collecting money in the form of taxes.
References
1. (n.d.). Tutor2u-Market Failure: Merit Goods [WWW Page]. http://tutor2u.net/economics/content/topics/marketfail/merit_goods.htm Read More
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