EJC Econs N2022 H2 EQ3

Suggested answer for 2022 A-Level Paper 2 Question 3 Street lighting is considered to be a public good. However, there are also negative externalities resulting from the generation of electricity for the lighting on the environment and the effect of bright street lights on wildlife. a) Explain two different reasons f or the market failure associated with the provision of street lighting [10] b) Discuss the extent to which a government should intervene in the market to ensure that the benefits of street lighting can be obtained while minimising the negative impacts. [15] Part (a) - Question Analysis Approach Command Word Explain Question Type Cause and effect Start point 1. Public good 2. Negative externalities End Point Market failure Content and Context Content • Market failure (allocative efficiency) • Public good (non-rivalrous, non-excludable in consumption) • Negative externalities Context Street lighting, electricity Introduction State essay approach: Street lighting is a public good as it non-excludable, non-rivalrous and non- rejectable in consumption. The free market would not provide public good as there is a lack of price signal, leading to a missing market where there is zero allocation of resources. Hence government need to intervene by directly providing the street lights to benefit society. Street lights consume electricity which generates negative externalities, leading to overallocation of resources. Body Point 1: One reason for the market failure associated with the provision of street lighting is lack of price signal • Street lighting is non-excludable in consumption. It is impossible or very costly to exclude non- payers from consuming street lighting once it is provided as non-payers could easily enjoy the benefits of street lighting by being near the stree t lighting. Since those who cannot pay will not be excluded, no one has the incentive to pay for the good. This leads to free-rider problem where everyone will wait for someone else to pay, in hopes of enjoying the marginal benefit from the street lighting without having to pay for it. Hence, there will be no effective demand for street lighting and profit-maximizing firms will make the rational decision not to even enter the market to supply the street lighting. Therefore, if street lighting was left the free market, there would be no resources allocated to its production, leading to a missing market and complete market failure. • Street lighting is also non-rivalrous in consumption. This means that the consumption by one person does not reduce the amount available to another. When one person stands under the streetlight, the same amount of light is still available to the next user. Therefore, supplying street lighting to an additional user does not require anot