H1 Essay Question 3 Answers

H1 Question 3 a) Explain, using examples, what is meant by public goo d and demerit good. [10] Singapore did not fare well in three areas - availability, affordability and quality of pre- school services. The Lien Foundation called for pre-school education to be provided free for all children nationwide. Adapted from Straits Times, 21 July 2012 b) Discuss whether Singapore government should take char ge of preschool education, and offer it free to all children. [15] __________________________________________________________________ Suggested Answers: Part (a) Public goods refers to goods or services that are non-rivalry and no n-excludable in consumption. • A good is non-rival in consumption if one person’s con sumption of the good does not reduce the quantity available to another person. Because of this, once a public good is provided, the marginal cost of providing the good to an additional user is zero. With zero margina l cost, the basic principle of optimal resource allocation calls for provisi on of public goods and services at zero price or no charge. However, if the price is zero, no firm would want to supply the good. • A good is non-excludable in consumption if it is diff icult to exclude non- payers from enjoying the good. This gives rise to a fre e rider problem. Since non-payers can also enjoy the good, no one would be willing to pay for it. As a result, demand is concealed and difficult to estimate. With no price and marginal cost, this leads to zero production r esulting in complete market failure. • Examples of public goods are street lighting and floo d control. Once street lighting is provide, it does not get any dimmer just because another person is consuming it. It is also difficult to prevent the no n-payer from enjoying it once the streets are lighted up. Demerit goods are socially undesirable goods or services that generate negative externalities, and that the government feels people have over- consumed them. • Demerit good is rivalrous in consumption as one person’ s consumption of the good reduces the quantity available to another p erson. It is possible to exclude non-payers from enjoying the good and therefo re, it is excludable in consumptions. Consumers are willing to pay a price for it.

• Given that the nature of the demerit good is rival rous and excludable in consumption, the private companies provide them. Free-ma rket provision of demerit goods therefore leads to overconsumption and partial market failure. • The marginal social cost from undertaking the activity i s the marginal private cost faced by the smoker as well as external costs accr uing to third parties. Negative externalities will lead to divergen ce of private cost and social cost. With the presence of negative externalities, marginal social cost will be greater than marginal private cost. If ciga rettes were provided through the free market, social costs of smoking ex