TMJC 2022 A Level H2 EQ3

© TAMPINES MERIDIAN JUNIOR COLLEGE 2022 A Level H2 Economics, Paper 2 EQ3 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 for 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] Suggested answer (a) Introduction • Market failure describes the circumstances in which distortions in the markets prevent the price mechanism from allocating resources efficiently, resulting in welfare loss. • In the case of street lighting, it is generally not provided, i.e. public good, or considered to be overprovided in the free market due to the presence of negative externalities. Development Requirement 1: Public good • Street lighting is both non-rivalrous and non-excludable. • Non-rivalrous: Consumption of the good by one person does not diminish the quantity available for consumption by another person. The property of non -rivalry means that once the good is provided, the additional cost to provide for another person to benefit from consumin g the good is zero. In this context, the brightness of street lighting available to the next user will not reduce when one consumes/ passes by. Hence, the marginal cost of providing street light to one more person is zero. If the marginal cost is zero, the efficient price to charge should be zero (P = MC). If a price w as charged, there would be a welfare loss to society. But no private firms who are assumed to be profit-motivated would be willing to supply street light if the price is zero, resulting in zero supply of street lights. • Non-excludable: It is impossible, or prohibitively costly (not feasible) to exclude anyone from using the good once it is produced. The property of non -excludability gives rise to the free rider problem. Individual can free-ride on street lighting and utilize the lighting once it is installed without having to pay for it. The desire to be a free rider weakens the incentive for consumers to offer to pay for street light. Hence, no rational consumer will demand for street light, resulting in no expression of demand. Since there is no expression of demand, it is not possible to charge a market price for street light if the public good itself is left to the private firms.

© TAMPINES MERIDIAN JUNIOR COLLEGE • As a result, if street lightings are left to the market, they would not be provided at all. There is hence a missing market for street lighting, thus leading to complete market failure. The market has failed because no resources will be allocated to their production. Requirement 2: Good that exhibits negative externalities • N