(2014) A Level H2 Econs Essay Q3 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)

(2014) A Level H2 Econs Paper 2 Essay Q3

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3. There is considerable agreement over the need for governments to provide public goods. There is less agreement over the extent to which markets fail because of imperfect information.

(a) Explain why markets might fail in the case of public goods and where information is imperfect. [10]

Why market fails in the case of public goods

  1. Public goods are non-excludable and non-rival, for example, in the case of streetlights & national defence (use any 1 example for explanation)

  2. As a public good is non-excludable, it is not possible to exclude any groups / individuals from consuming the good once it is provided for, and this means that it is not possible to exclude non-payers from consuming the good. As a result, this creates a free-ridership problem where individuals can choose not to pay for the good but enjoy the good after it is made available. Private firms will not produce such a good as they cannot recover the cost associated with producing it.

  3. The non-rivalry nature of a good means that the quantity or quality of the good does not diminish with an additional user consuming the good, which means that the marginal cost to provide the good to an additional user is 0. Given that allocative efficient pricing should be at where P = MC, and MC = 0, this means that the allocative efficient pricing for a public good is 0. Private firms will not be willing to provide for a good at price = 0.

  4. The free market will simply leave the good unprovided for, even when there are immense benefits associated with the consumption of public goods – resulting in complete market failure.

 

Why market fails where information is imperfect

  1. In markets such as vaccinations, there exist imperfect information.

  2. For example, in the case of COVID-19 vaccinations, due to imperfect information, individuals may not be fully aware of the benefits associated with receiving a COVID-19 vaccination.

  3. This may cause individuals to underconsume COVID-19 vaccinations as they consume based on their perceived MPB = MPB at Qm instead of actual MPB = MPC at Q*

  4. This causes underconsumption to occur.

(b) Evaluate the alternative policies that are adopted by the Singapore government to correct for both these types of market failure. [15]

Free direct provision

  1. In the case of public goods like streetlights and national defence, these are goods that are provided for free by the Singapore government.

  2. There is no other choice than to provide such goods entirely for free as the free market will not provide for such a good.

  3. In the case of COVID-19 vaccinations, the free market is able to provide such a good as COVID-19 vaccinations are both excludable & rival in nature.

  4. Yet, in this case, the Singapore government has chosen to make the vaccination free for the entire resident population + select foreign worker groups.

  5. This could be because that if left to the free market, there could be significant underconsumption of the good collectively due to

    • Information failure

    • Positive Externalities

 

Education campaigns

  1. The problem of imperfect information should be rightfully corrected by ensuring proper flow of information and communications

  2. The Singapore government carries out education campaigns with regards to goods like vaccinations, for example through both TV, Print and Direct Mailer advertisements to communicate about the safety and benefits of receiving COVID-19 vaccinations

  3. This will correct the perceived benefits of individuals to match the actual benefits to encourage an increase in consumption of COVID-19 vaccinations

  4. However – some may still be sceptical and may not trust or understand the information provided.

  5. In addition, there may be groups that might be hard to reach out to.

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