Economics of public sector Assignment

Economics of public sector Assignment Words: 942

Incalculable: It is impossible or uneconomical to prevent someone from consuming the good once it is produced. The market economy under-produces these goods because it is impossible to exclude non-payers from enjoying them. Graphically, non rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good . This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.

Merit goods – goods or services (such as education and vaccination) provided free for the benefit of the entire society by the government. A merit good can be defined as good which would be under-consumed and under-produced in the free market economy. This is due to two main reasons: 1 . When consumed, a merit good creates positive externalities. This means that there is a divergence between public and private benefit when a merit good is consumed. As consumers only take into account private benefits when consuming merit goods, it means that they are under-consumed (and so under-produced) 2.

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Individuals are myopic, they are short-term utility maximizes and so do not take into account long term benefits of consuming a merit good, and so they are under-consumed. The private sector won’t provide these goods in sufficient quantity, then the only way more will be provided is either if the government encourages firms to produce more (perhaps by subsidizing the good or service) or if provides them itself. A significant proportion of government expenditure arises from the government providing merit goods.

There are many hybrid goods that posses some features of both public and private goods but whose institution by one consumer does not preclude other members of society from consuming them to some extend. This category is called impure public goods. A perfect example is a highway system. Once built, everybody who owns a vehicle can use it. That means the impure public good can also be consumed jointly. However, in some instances there is a way to exclude certain individuals from using them or at least make them pay for the consumption by using tolls.

Why would anyone want to exclude some people from enjoying the highway system? Because increasing the group size of nonusers decreases the marginal benefit to an individual – the highways are getting too crowded. Impure public goods can be divided into: C] Private Goods: An economic good, or a tangible item that can be purchased and traded within a market. Private goods are calculable. They are also rival, or subtracted. You can’t eat a hamburger that is being eaten by someone else. Гњ Club Goods: Goods that are calculable but non-rival, or non- subtracted.

This means that while certain people can be excluded from the consumption of a good, one person’s consumption of it does not diminish another person’s. For example: Community services, including those provided by religious organizations; cable television; computer software. Problem – If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. This saves each of us from our own tendency to be a free rider, while also assuring us that no one else will be allowed to free ride.

One frequently proposed solution to the problem is for governments or states to impose taxation to fund the production of public goods. This does not actually solve the theoretical problem because good government is itself a public good. Thus it is difficult to ensure the government has an incentive to provide the optimum amount even if it were possible for the government to determine precisely what amount would be optimum. These issues are studied by public choice theory and public finance.

One of the achievements for which the great English economist A. C. Piggy is known, was his work on the divergences between marginal private costs and marginal social costs (externalities). Piggy describes as positive externalities, examples such as resources invested in private parks hat improve the surrounding air, and scientific research from which discoveries of high practical utility often grow. Alternatively, he describes negative externalities, such as the factory that destroys a great part of the amenities of neighboring sites.

In 1 960, the economist Ronald H. Cease proposed an alternative scheme whereby negative externalities are dealt with through the appropriate assignment of property rights. This result is known as the Cease Theorem. EXPLAIN PRINCIPLE ECONOMIC ROLES OF THE GOVERNMENT. In general economic roles of government are: ; allocation role ; distributive role regulatory role ; stabilization role The four main economic roles of government are: The allocation role: the government pursues that allocation of resources which maximizes economic welfare.

This is generally referred to as allocation efficiency or the first best allocation of resources. The government has to deal with market distortions caused by monopoly power and other forms of market failure. The distributive role: the government balances allocation efficiency with equity in the allocation of resources by using taxation, social security and the distribution of public sector services to influence the striation income.

The regulatory role: the government legislates and enforces laws of contract, consumer protection, justice and so on, in order that the market economy may function. The stabilization role: whereas the allocation, distributive and regulatory roles are microeconomic in nature, the stabilization role is macroeconomic in using fiscal, monetary and other economic policies to pursue objectives for the control of inflation, unemployment and so on.

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