RVHS_H2_ECONS_P2_Essay_Q2_Soln

The cornerstone of the Singapore government’s philo sophy towards public housing lies in the Home Ownership Scheme introduced in 1964. It involves the provision of fairly generous and broad-based subsidies to ensure affordable and thus widespread home ownership. Source: Lee Kuan Yew School of Public Policy, 2014 (a) Using appropriate examples, explain the key dif ferences between a merit good and a public good. [10] (b) Discuss the determinants of a government’s decision to intervene in the market for public housing. [15] A merit good and a public good can be differentiate d by characteristics of non-rivalry and non-excludability. As a consequence, the different implications of the characteristics on the level of government intervention can also be a distinguishing factor between the two goods. Merit good is a private good which is rival in cons umption and excludable. It is defined as a good which is deemed socially desirable by the gove rnment but under-consumed and it is mainly caused by disregard of positive externalitie s and ignorance of private benefits while public good is a good which displays characteristics of non-rivalry and non-excludability. The first key difference is about non-rivalry. Non- rivalry means that the consumption by an additional consumer does not diminish the amount av ailable for consumption by others. As such, this implies that a good which is non-rival w ill have a marginal cost of serving an additional user being zero. With zero marginal cost , allocative efficiency is achieved only when the good is provided to all who want it at no charge (P=MC=0). At a zero price, the private markets will not produce the goods and any non-zero price would discourage some users from enjoying the good, thereby causing a red uction in society’s total welfare. For instance, a public good like national defence has t he characteristic of non-rivalry that one more resident into the country will not diminish th e amount of protection that the people currently in the country enjoy. While a public good is non-rival in consumption, a merit good is usually rival in consumption. This means that the consumption by an additional co nsumer diminishes the amount available for consumption by others. Therefore, the marginal cost of serving an additional consumer is not zero. With non-zero marginal cost, allocative efficiency is thus achieved when the good is provided at non-zero price (i.e. P = MC> 0). Given that producers would only be willing and able to sell at a price that is at least equal to their marginal cost of production, when left to the market forces, profit-seeking producers will be able to charge for their services, meaning the free market is able to produce it. For example, a merit good like healthcare is rival in consumption as one more patient seeing the doctor will deprive another patient from healthcare services at the same time