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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 advantage between 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:
- Governments provide public goods when private firms fail.
- The public goods are financed by government tax revenues.

Note

Remember the concept of scarcity:

Government tax revenues are limited, hence they need to make a choice which public goods need to be provided and in what quantities.

Contracting Out to Private Sector:
- Governments outsource the provision of public goods to private firms.
- This will be financed again by the revenue gained from government tax.
- Private firms are often more efficient and skilled, as they operate in a competitive setting.
- This forces them to be as efficient as possible to remain in the market, which could be beneficial.
- However, private firms will only do the contract if there are profits to be earned.

Hint

Governments lose control over the services that are contracted out.
There are potential risks to the quality of public goods provided.

Case study

Privatization of British Railway Systems

The British Government, in 1993, in search of higher efficiency, improved service, and decreased public spending, privatized its British Rail (BR). The railway was divided between 100 firms, with train operating companies (TOCs) running specific routes, while the infrastructure responsibilities were passed on to Railtrack (later Network Rail).

Goals of Privatization:
1. Increase Efficiency
2. Attract Investment
3. Reduce Government Spending
4. Ignite Competition
While the privatization helped some routes to get better service and through private investments, new trains to be acquired, there were still numerous challenges:
1. Rising Prices
2. Quality Control
3. Public Bailouts

Note

In Summary:

Public Goods are non-excludable and non-rivalrous.
Consumers may choose to not pay for public goods and free ride.
Governments have to intervene to make sure that public goods are provided, to correct market failure.

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Tip

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Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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.

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

Direct Provision by Government:
- Governments provide public goods when private firms fail.
- The public goods are financed by government tax revenues.

Note

Remember the concept of scarcity:

Government tax revenues are limited, hence they need to make a choice which public goods need to be provided and in what quantities.

Contracting Out to Private Sector:
- Governments outsource the provision of public goods to private firms.
- This will be financed again by the revenue gained from government tax.
- Private firms are often more efficient and skilled, as they operate in a competitive setting.
- This forces them to be as efficient as possible to remain in the market, which could be beneficial.
- However, private firms will only do the contract if there are profits to be earned.

Hint

Governments lose control over the services that are contracted out.
There are potential risks to the quality of public goods provided.

Case study

Privatization of British Railway Systems

Goals of Privatization:
1. Increase Efficiency
2. Attract Investment
3. Reduce Government Spending
4. Ignite Competition
While the privatization helped some routes to get better service and through private investments, new trains to be acquired, there were still numerous challenges:
1. Rising Prices
2. Quality Control
3. Public Bailouts

Note

In Summary:

Public Goods are non-excludable and non-rivalrous.
Consumers may choose to not pay for public goods and free ride.
Governments have to intervene to make sure that public goods are provided, to correct market failure.

Unlock the rest of this chapter with a Free account

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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Note

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

2.9.2 Government intervention in response to public goods Notes

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anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Want a cheatsheet?

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

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anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

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