HCI_H1_ECONS_EssayQ3_ans

HWA CHONG INSTITUTION C2 Preliminary Examination 2016 Higher 1 Economics Essay Question 3 Suggested Answer 3 (a) Explain, using examples, what is meant by public good and merit good. Explain the TWO Characteristics of Public Good 1) Non-excludable in consumption is when it is impossible or prohibitively expensive to exclude non-payers from consuming it. For example, once street lighting is provided, there is no inexpensive or practi cal way to restrict the availability of the service to only people who pay for their use. The same can be said for national defence. For example, once an army is provided to defend the country, every citizen benefits from its protection regardless of whether they pay for it. 2) Non-rivalry in consumption is when the consumption by one does not reduce the amount available to others. For example, the use of the street lighting by one pedestrian will not reduce the amount of light available to others. The benefit of street lighting can be shared jointly by everyone who happened to be in the vicinity of the street lights. Implication of the characteristics of Public Goods on its provision by the market As a result of the characteristics of non-excludability, once a public good is provided, others can free-ride on the good. A free-rider is anyone who receives the benefits from a good or service without having to pay for it. Since anyone can enjoy all the benefits of a public good once it is produced without paying for it, no rational consumer motivated by self-interest will reveal his effective demand. There will be no price signals to indicate consumers preference for such goods . Hence in the absence of price signal, producers will not supply this good. As a result of the characteristics of non-rivalry, the marginal cost of providing a public good to an additional consumer is zero . For example, since joint or collective consumption is possible, once an army is formed, the total cost of defending the country is the same regardless of the number of persons the army has to protect. There is no extra cost involved for defending an additional person. Since the optimal or allocatively efficient quantity to supply is where P=MC, the efficient price to charge for the use of public good should be zero. Due to the twin characteristics associated with public goods, it is not possible for free markets to supply such goods profitably because it is neither possible (due to non- excludability in consumption) nor desirable (d ue to non-rivalry in consumption) for private producers to charge a price for its use. Without the profit incentive and price signals, the market fails in the provision of public goods . Hence public goods are provided by the government as the market cannot allocate resources to produce them. Explain what is a Merit Good Merit Goods are goods or services that have been deemed by the government as [10]

socially desirable but underconsumed. Some