NYJC_H1_ECON_ESSAY_QN_3

"As Singapore shifts its economic focus from industralization to a knowledge based economy, attaining academic qualifications is becoming increasingly important. Knowledge is now recognised as a main driver for economic productivity and growth" Adapted from http://www.interimcareersolutions.com/onlineeducation.html a. Explain the terms ‘public good’ and ‘positiv e externality’, making clear in each case how they cause markets to fail. [10] Suggested Answer Synopsis: Public good and positive externality should be explained via examples. Question should also requires students to demonstrate how public good and positive externality are sources of market failure. 1. Explain public goods a. Definition b. Explain non-rivalry in consumption using example - It means that consumption of the good does not reduce the total supply to available to others. - Use of street lighting, upon consumption by one person does not leave less available for others. (Other examples are traffic lights, light house) c. Explain non-excludability in consumption using example - It means that once the good is provided, it is impossible to exclude any consumers from using it. - Once produced, the good is available to all members of the community irrespective of whether the individual pays for it or not. - National defence is one good example, once produced, it provide protection for all in the country and even for those who did not pay taxes. E.g. students. (other example includes free to air television channels and radio broadcasting) 2. How public goods cause market to fail a. Explain how non-excludability gives rise to free rider problem - Due to non-excludability nature of the good, we cannot exclude non payers from enjoying the good. They would then consume without paying for it and thus they free ride on the production made. b. Explain the output in the market - Private sector will not be willing to produce such goods due to non-excludability characteristics and it makes charging a price impossible for firms. - Thus, in the free market which is profit-driven, no resources will be allocated to the production of public goods. Hence, no provision of public goods. - This causes market to fail. 3. Explain positive externality a. Definition b. Explanation using example (e.g. Vaccination) - Activity taken is vaccination against H1N1.

- 1st parties are the ones undertaking the vaccination and incur private costs and private benefits. (Private cost here to refers to the cost of the vaccination and private benefits refer to the protection from H1N1 virus.) - Their actions to take the vaccine has a positive external benefits on the society. - 3rd parties are the people around those who are immunised or come in close