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, given the finite amount of resources such as doctor’s consultation time. The second difference is about non-excludability. N on-excludability means that it is prohibitively expensive or impossible to block non- payers from enjoying the good. A public good is non-excludable while a merit good is exclud able in consumption. The problem of free-ridership therefore exists in the context of a public good due to non-excludability. Since non-payers can also consume the good, no one would be willing to pay for the good. At the same time, as no profit-seeking producer will be willing to produce a good at a zero price, the free market will not produce the good, even though consumers want the good. For example, it is impossible to block a non-payer from enjoying th e protection that national defence provides.

On the other hand, a merit good is excludable in consumption as it is possible to exclude any non-payers from enjoying the benefits of consumptio n. Producers will therefore be able to segregate consumers into payers and non-payers. As non-payers do not get to consume the service, people would be willing to pay for the goo d as the problem of free-ridership is non- existent. For example, a patient will not be granted access to a doctor if he refuses to pay for the services, implying excludability in the healthcare market, which is a private good. These differences lead to the different extent of m arket failure. As mentioned earlier, because of the implications of non-rivalry and non- excludability, a public good is a case of complete market failure and there will be zero prod uction by the private market even though there is demand for it. As such, it will require fu ll government intervention in order for the good to be produced. On the other hand, the presence of positive externalities and imperfect information will mean there is a need for some degree of government intervention to shift the consumption level from Qm to Qs as there will be under-consumption in the market. For example, healthcare generates positive external ities. When employees actively go for health check-ups at regular periodic periods, the private benefits w ill be about getting to detect early their personal medical problems and thereby allowing them to go for appropriate treatment. At the same time, they generate positive externalities (external benefits) for third parties like the employers and co-workers. The employers benefit from cost savings as costs of cover, overtime costs and training costs are red uced while co-workers benefit from the higher productivity when their fellow workers are fit and well. In addition, a merit good is also caused by imperfect information. In the context of healthcare, due to complex information and ignorance, consumers might not know the full extent of the benefits of healthcare services and this result in under-consumption of healthcare services As such, some form of government intervention might be required to correct the under- consumption. As such, a public good will result in a complete ma rket failure with no production from the free market while a merit good will result in a partial market failure with under-consumption. Level Description Marks L3 For an answer that uses appropriate analysis to i) explain the differences of public good and merit good through t he characteristics of non-rivalry and non-excludability and included the respective implications. ii) ALSO made use of appropriate exam ples from the real world to illustrate understanding of the two characteristics. 8-10 L2 A descriptive explanation of the characteristics of non-rivalry and non- excludability and the required underlying implications. 5-7 L1 Knowledge of what is meant by public good and me rit good and/or the underlying implications of the characteristics. 1-4

b) Discuss the determinants of a government’s decision to intervene in the market for public housing. [15] The governments around the world intervene in the m arket for public housing because the price mechanism in an unregulated market fails to a chieve a socially optimal allocation of resources and market failure arises. Specifically, public housing is residential properties created by the Housing Development Board of Singapo re to accommodate the majority of the citizens of the country. It is a private good t hat has positive externalities and thus, it can be provided by the private market but there will be under-allocation of resources to the industry. As such, government intervention will be advocated and there are a few determinants that will affect a government’s decisi on on the degree and type of intervention in the market for public housing. The government often have to weigh the costs and benefits of intervention and they will only intervene if the benefits outweigh the costs of intervention. The considerations also hinge on the conditions and characteristi