Notes for 2.9.2 Government intervention in response to public goods - IB | RevisionDojo
2.9.2 Government intervention in response to public goods Notes
To address the free rider problem and reach market efficiency, governments often intervene to ensure the provision of public goods.
There are two ways in which governments can intervene:
Direct Provision
Contracting Out to Private Sector
Tip
There is no clear advantagebetween the two methods. Governments need to do a cost-benefit analysis, to compare the Marginal Benefits (MB) of e.g direct provision of the public good to its Marginal Costs (MC).
Direct Provision by Government:
Governmentsprovide public goods when private firms fail.
The public goods are financedby government tax revenues.
Note
Remember the concept of scarcity:
Government tax revenues are limited, hence they need to make a choicewhichpublic goods need to be provided and inwhat quantities.
Contracting Out to Private Sector:
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Questions
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Question 1
Recap question
A local government is planning a public fireworks display. When providing this public good directly, how should the government determine the optimal number of fireworks shows to hold?
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Note
Public goods are essential resources that everyone can use without reducing their availability to others. Examples include national defense, public parks, and street lighting. These goods are characterized by two main features: they are non-excludable, meaning people cannot be prevented from using them, and non-rivalrous, meaning one person's use does not diminish another's. DefinitionFree Rider ProblemA situation where individuals benefit from resources or services without paying for them, relying on others to bear the cost. This problem occurs because people can enjoy public goods without contributing to their provision, leading to underproduction or no production at all in a free market. AnalogyThink of a group project where everyone benefits from a good grade, but some members choose not to contribute, hoping others will do the work. This is similar to the free rider problem with public goods.ExampleStreet lighting is a public good because everyone in a neighborhood benefits from it, whether they contribute to its maintenance or not.
