4th SEMESTER CC-8 Unit - 3 PUBLIC GOODS AND MARKET FAILURES - Public goods are those goods which are Non-Rivalyy and Non-Exclusive in consumption - Example~ Nabional Defense , television signals, pollution conbroL project, ete. ~ These Public goods, Like National defense is non rivalyy in consumption because consum tion of thesd cods ~by an individual does not reduce Its amount available for other consumers, ~ Non- excludability amneans goods thot provide to all members of asocieby and benifits are available to all eqyally » irrespective of whether some people poy for it or mot. -This non-exclusive mature of o public good causes emarket failure» This characteristic create Free - Rider Problem. _ Free-Rider + A Free Rider is an individual who receives the benifit of consuming poblic good without paying for it. Therefore, Free-Rider's problem arise when producers are not able to prevent those from consuming these who do not pay their share of cost. — OCdNneu Wit LdlnscaDueto the presence of Free- Rider , goods are mot provided through the market mechanism - This can be seen with the help of the Following diagrams + i Prigg. Cln Rupees) Wice aa KE Ps E10 fea} Pe | oe Pn , ° oF Quantity Fy t Fig-2 Private Giood | Public Grood Suppose there are two individuals in the market} individual A and 8, and their corresponding demand lourve is Dy and Dg: Since a private geod is rival th consum tion » the market demand ‘curve of ib is obtained by adding up sideways (Horizontal addition) of the individual demand curve. 4, the market demand curve of the private good is Dm and the sopply eorve is °s), “The vilibrium price which is determined through the market mechamism is “OP? where P is Z10 per kg land the quantity of good available in the market’ is 50 kg: | oCdNneu Wit Lalnsoca In Fig-| fee a | ere, we can see that price of the good, Is samme or all individual. If individual A demands for 20 kg, then A must pay £200. That means if an individual does not pay £1o/kg , then he is excluded| om consuming this geod: “In Fig. 2, Dy and Dg is the demand eurve of the public good for individual Aand B ,respectively. The market demand curve for the public good Is denoted by Dm in Fig. 2» which is derived b gormming'| op vertical y the demand curves of the individual demand curves. ~ Consider Fig. 2. lt will be seen that individoal A is prepared to pay price OP, flor oa qyvalib of poblic good and the individual Bis repared to poy price OP, for the same quantity of publica good 0Q* . Thus, in case of public goods , same onits of ovtpyt can be consumed. by different individuals at different price or there roi be some people who do not pay for this benifit : Due to this problem, a rofit moximizing firm will etther not produce a public geod or produce too Little of it. This creates economic inefficiency. Reference — nr 6 . 4 HL. Ahuja * Principles of Mrearoeconomics ’ 2 Robert S. Pindyck & Daniel L. Rubinfeld : v Microeconomics’ - Prentice Hall be oCdNneu With LalnocaQuestions — 4. What is Public Giood 9 2. What are the characteristics of Public Gioods? 3. What do you understand by Free - Rider Problem? 4, Explain that competitive market fail due to the presence of Public Groods. oCaNneu Wit Lalnoca