2013_HCI_H1_Econs_Essay Q3

HWA CHONG INSTITUTION Year Two H1 Economics 2013 3 (a) Explain why government intervention is advocated in the markets both for public goods and merit goods. [10] (b) There is free wireless connectivity in public areas through Wireless@SG in Singapore. Discuss whether wireless connectivity should be provided free by the government. [15] ---------------------------------------------------------------------------------------------------------------------------------------------- Suggested Outline: part (a) (i) Explain public goods resultin g in complete market failure A pure public good is a good or a se rvice that has the characteristics of non-excludability and non-rivalry. As such, they will not be provided by the market. Non-excludable (Free-rider problem) It is impossible or prohibitively expensive to exclude non-payers from using it. For instance, once street lighting is provided, there is no inexpensive or practical way to restrict the availability of the service to people who pay. Non Rivalry (MC=0) Consumption of the good by additional individuals will not prevent others from enjoying the same good, or reduce the quantity and quality consumed by existing consumers. Marginal cost of providing the good to the additional user is zero. For instance, the use of the street lighting by a pedestrian will not reduce the amount of light available to others. Missing market/ Complete market failure As a result of the character istics of non-excludability, the provisi on of public goods suffers from the “free- rider” problem. Since it is not possible to exclude those who do not pay from consuming the good, no self- interest, rational co nsumer will reveal his effective demand an d hence has no incentive to pay what the good really is worth to them. Since anyone can enjoy all the benefits of a pure public good once it is produced without paying for it, there will be an absence of price signal and producers will not supply this good. Hence, despite the fact that a pure public good yields valuable benefits to society, the “free rider” problem means that the market will not provide such a good. As a result of the c haracteristics of non-rivalry, no self-interest, a rational firm will not be willing to produce the good or service. Therefore government intervenes to provide what is socially optimal. (ii) Explain merit goods resulting in under consumption/ production MERIT GOODS are goods or services that have been deemed by the government as socially desirable and under-consumed/produced and their desirability is usually due to external benefits spilled over to the society.

       Th m Le L3 L2 L1 Assume t Thus, PM In perfect PMC. But due t Benefit (S above P M efficient o Hence, th Area YZQ Area XZQ Area XY Z market i.e hus, gove r ore resour evel Mar k 3 7 – 1 2 5 – 6 1 1 – 4 that this ac t MC=SMC. tly competit to the po