Public Goods Are Non-Rival Consumption Goods and Non-Excludable Goods free essay sample

In both cases it is difficult to determine the optimum price at which the good must be provided to the economy. Difference between them is that goods which are non rival it is possible for them to be excludable and non excludable goods can be rival. These points are explained below. Non-rival consumption goods may not be Non excludable. For example Cinemas, private parks, satellite television goods are non-rival in consumption but are excludable as it is possible to charge a price for using these goods and exclude those from using who are not willing to pay for them. Non Excludable goods may not be Non-rival in consumption. For example Common Property resources like water, timber, coal are goods which are non excludable but are rivalrous in nature as consumption by one individual reduces the availability of these goods to other individuals. Unlike excludability, rivalness is a physical characteristic of a resource and not a policy variable. We will write a custom essay sample on Public Goods Are Non-Rival Consumption Goods and Non-Excludable Goods or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In case of Non Rival goods the marginal cost of an additional consumer is zero. Hence efficient price for using an existing non-rival good is zero because a positive price reduces use and hence benefits without reducing costs. Market efficiency requires that the marginal cost of providing an additional good or service must be equal to the sum of marginal benefits of all individuals. If market allocates the good it will be sold at a price. However, marginal cost of non rival good is zero and price of a good by definition is greater than zero otherwise market cannot allocate the good efficiently. But charging a nonzero market price would mean that there is no equality between Marginal Cost and sum of Marginal Benefits. Hence, Market allocation of non-rival goods would lead to inefficiency. When Market allocates goods it is contingent upon payment of price for it. An individual may be denied from the consumption of the good unless he is willing and able to the price for it or he is able to establish property rights over it. However, in case of non excludable goods such exclusion is not possible. This creates a problem of preference revelation for such goods. If people can consume a good regardless of whether or not they pay for it, they have an incentive to pay less or not pay for the good. Therefore, people can enjoy the benefits of consuming the good without any personal cost. This leads to the problem of ‘free rider’ i. e. every individual is keen to free ride the good rather than paying for it and if people are unwilling to pay for the good then there will be little or no profit in its production and hence investment in the production of these goods would be very less or at least not up to the point where Marginal cost of the good is equal to the sum of marginal benefits of all individuals. Hence, market cannot allocate non excludable good efficiently. Therefore, market allocation of non rival and non excludable goods would lead to sub-optimal production of these goods. When a good is both non rival and non excludable it becomes a pure public good. It becomes impossible for market to allocate these goods. No one is willing to produce these goods. This creates the need for government intervention in provision of these goods. Assignment 2 13. â€Å"An externality exists when the consumption or production choices of one person or firm enter the utility or production function of another person or firm without permission or compensation. Explain this with the help of Bart and Lisa example discussed in the text. Answer: When the activity of one entity (a person or a firm) directly affects the welfare of another in a way that is outside the market mechanism, the effect is called an Externality. It greatly affects economic efficiency. In the presence of externalities the resource allocation provided by the market will not be socially efficient. Since individuals do not bear the full cost of the negative externalities they generate, they will engage in an excessive amount of such activities. On the other hand, since individuals do not enjoy the full benefits of activities generating positive externalities, they will engage in too little of these. Therefore, without government intervention such activities would be either too high or too low than what is socially efficient. Inefficiency due to externality arises as a consequence of failure or inability to establish property rights. We can show how externality leads to inefficiency through the example of Bart and Lisa. Suppose that Bart owns a cement factory that dumps its garbage into a river nobody owns. Lisa catches fishes from this river for the fishery she owns. In this case the water pollution by Bart’s cement factory creates a negative externality for Lisa’s fishery by dirtying the river and hence reducing the number of fishes in it. On the other hand, Lisa’s fishing in the same river also creates a negative externality for Bart’s cement factory by increasing its social cost of production by polluting the river by her fishermen. Externality in this case arises because nobody owns the river. If Bart owned the river then he could charge Lisa for using his river and if Lisa owned it she could charge Bart instead.