(2022) A Level H2 Econs Essay Q3 Suggested Answer by Mr Eugene Toh (A Level Economics Tutor)
(2022) A Level H2 Econs Paper 2 Essay Q3
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3. Stree lighting is considered to be a public good. However, there are also negative externalities resulting from the generation of electricity for the lighting on the environment and the effect of bright street lights on wildlife.
(a) Explain two different reasons for the market failure associated with the provision of street lighting. [10]
What are public goods and why street lights are public goods
Public goods are goods that are considered to be non-excludable and non-rival in consumption.
Street lighting is non-excludable as once provided, it is not possible to exclude any specific individual / groups from the usage of street lights i.e. in the case of street lighting, anyone walking in the vicinity of the street light will be able to use it for safety and guidance.
Street lighting is also non-rival in consumption. The quantity and quality of the street light does not diminish with an additional user consuming the good. In the case of street lighting, once provided, everyone receives the same amount of luminance with the amount of lighting not reduced if there are additional users consuming it.
How market failure occurs in the provision of street lights
The non-excludability nature of street lights will result in a free-ridership problem.
Since it is not possible to exclude anyone from the consumption of the good, this means it is also not possible to exclude non-payers from consuming the good.
Free-riders can just wait for the good to be provided for and enjoy it for free.
If most people end up doing that, there will be an absence of demand for the good and firms cannot recover the cost associated with the production of such good.
As the good is also non-rival in consumption, the cost of providing the good to an additional user is 0.
Given that the allocative efficient pricing is where MC=0, this would effectively mean that the allocative efficient pricing for a public good is when P = MC = 0.
No producer will be willing to provide a good where they cannot recover the cost associated with the provision of such a good → this will mean that the good (street lighting) will be left unprovided for by the free market.
Negative externalities associated with light pollution
Negative externalities are cost imposed on third parties who are not directly involved in the production or consumption of a good.
Street lights, when provided for, generates light pollution.
In this case of light pollution, when the state considers the provision of street lights, the state may consider private costs associated with the provision of street lights (production costs) and private benefits associated with the provision of street lights (benefits to the general public from having streets lighted, providing safety and guidance) and thus produce at Qm where MPC=MPB.
This may fail to consider the presence of negative externalities or MEC.
Negative externalities can come in the form of light pollution where neighbours staying nearby may have ‘light’ trespass across their property boundaries, keeping them up at night (and have advese impact on their health) or may have adverse impacts on animal ecosystems such as causing an algae bloom in rivers / lakes causing poorer water quality / and killing off lake plants → these can have impacts on residents living nearby as well.
As MSC = MPC + MEC, the socially optimal level of consumption should be at QS where MSC = MSB, but since production might be at Qm instead of Qs (if the state fails to consider the MEC), there may be overproduction casuing market failure.
(b) Discuss the extent to which a government should intervene in the market to ensure that the benefits of street lighting can be obtained while minimising the negative impacts. [15]
Should the government intervene in terms of provision?
As discussed in (a), the nature of street lights being non-excludable causes a free ridership problem while the non-rivalry in consumption requires pricing to be 0 to be allocatively efficient.
This will leave the good unproduced by the free market.
Given the importance and immense benefits of street lights to society (reducing crime rate, increasing safety, providing light to motorists and pedestrians) - such benefits would be completely lost if the government does not step in to provide.
Therefore, the only way for a positive outcome would be for the government to intervene through direct and free provision of street lights.
How to decide on the extent of provision
Yet, also as argued in (a), indiscriminate provision of street lights can result in significant externalities being generated in the form of light pollution.
The government should do careful consideration and weigh each individual street light project separately.
Benefits of provision of street lights should be decided based on the number of users who would both benefit from the placement of street lights while costs should include both monetary costs associated with such provision (building, running costs and maintenance) as well as the potential negative impacts on third parties associated with such provision.
In cases where benefits far outweigh the costs, such street lighting projects should be greenlighted.
In case where the costs far outweigh the benefits, it is worth considering whether in such an area it may be better to omit the building of street lights.7
Minimising negative impacts
While provision is paramount in the case of street lighting, there are several ways that the negative impacts can be minimised while obtaining the benefits.
The adoption of technology can ensure that the street light are not kept lit throughout the night but rather activated by motion sensors. This can reduce the level of light pollution, particularly in secluded areas where there may not be many users throughout the night.
Another way would be to consider placing trees in between street lights and residential areas to reduce the amount of light reaching the residential areas and thus reduce the likelihood of light pollution affecting nearby residents.
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