addressing the non-provision of public goods

Reasons for Government Intervention in Markets (Cambridge AS & A‑Level Economics 9708)

1. Syllabus Mapping (3.1 – 3.3)

Syllabus sub‑topic (3.1‑3.3)	Covered in notes	Additional note (if any)
Non‑provision of public goods	✔	Includes a brief discussion of possible government failure (budget constraints, political motives).
Under‑consumption of merit goods	✔	Added measurement indicators (enrolment rates, vaccination coverage).
Over‑consumption of demerit goods	✔	Added quantification of social costs (e.g., health‑care costs of smoking).
Price‑control motives (ceilings, floors, buffer‑stock schemes)	✔	Buffer‑stock schemes explicitly linked to price‑control motives.
Methods of government intervention	✔	Cross‑checked against syllabus list – taxes, subsidies, direct provision, regulation/mandates, PPPs, information provision all appear.
Evaluation criteria (efficiency, equity, government failure, distributional impact, administrative cost, political feasibility)	✔	Added rows on administrative cost and political feasibility in the summary table.

2. Why Does the State Intervene?

Market Failure / Motive	What goes wrong?	Typical Government Response
Non‑provision of public goods	Goods are non‑excludable and non‑rivalrous. Private firms cannot charge users → free‑rider problem → quantity supplied < Qm (under‑provided). Government may also fail (budget limits, political pressure).	Direct provision, subsidies, taxation, public‑private partnerships (PPP), regulation/mandates.
Under‑consumption of merit goods	Positive externalities mean marginal social benefit (MSB) > marginal private benefit (MPB). Consumers purchase less than the socially optimal quantity Q* (e.g., low school enrolment, vaccination rates below target).	Subsidies, vouchers, free provision, compulsory attendance, information campaigns.
Over‑consumption of demerit goods	Negative externalities make marginal social cost (MSC) > marginal private cost (MPC). Quantity demanded exceeds Q* (e.g., smoking, sugary drinks). Social cost can be quantified (e.g., ££ per smoker in health‑care expenses).	Excise taxes, bans/restrictions, age limits, public‑health information, regulation/mandates.
Price‑control motives	Government may wish to protect consumers (price ceiling) or producers (price floor) from market prices deemed “unfair”, or to stabilise incomes/commodity markets.	Price ceilings, price floors, buffer‑stock schemes (buy low‑sell high to smooth prices).

Key concepts to remember

• Marginal analysis: decisions are made where marginal benefit = marginal cost, assuming ceteris paribus and rational behaviour; otherwise the equality may not hold.
• Efficiency: allocation where MSB = MSC (no dead‑weight loss).
• Equity: fairness of the distribution of costs and benefits; taxes can spread the cost of public goods more evenly.
• Government failure: situations where state intervention does not improve welfare (e.g., under‑provision due to fiscal constraints, rent‑seeking, bureaucratic inefficiency).
• Role of government: correct market failures, improve equity and help achieve macro‑economic objectives.

3. Public Goods – Non‑Provision

Characteristics

• Non‑excludability: once supplied, nobody can be prevented from using it.
• Non‑rivalry: one person’s use does not diminish the amount available to others.

Economic theory

In a perfectly competitive market the efficient outcome is where MPB = MPC. For a public good the socially optimal condition is:

MSB = MSC

• MSB = MPB + external benefit
• MSC = MPC (production costs are internalised)

If the market supplies only Q_m where MPB = MPC, the socially optimal quantity Q* is larger because MSB > MPB for each unit up to Q*.

Typical government interventions

1. Direct provision: State produces the good (e.g. national defence, street lighting).
2. Subsidies to private providers: Per‑unit payment that raises private marginal benefit to equal MSB.
3. Financing through taxation: General or specific taxes spread the cost across the whole population.
4. Regulation / mandates: Compulsory provision (e.g. compulsory schooling for a public‑good component of education).
5. Public‑private partnerships (PPP): Government funds part of the project while a private firm supplies expertise or management.

Diagram suggestion

Supply‑demand diagram for a public good should show:

• Horizontal axis labelled “Quantity”.
• Vertical axis labelled “Marginal Benefit / Cost”.
• MPB (dashed downward‑sloping line) intersecting MPC (dashed upward‑sloping line) at Q_m.
• MSB (solid line above MPB) intersecting MSC (=MPC) (solid upward line) at Q*.
• Shaded dead‑weight loss triangle: \(\frac12 (Q^* - Q_m)(MSB - MPC)\).

4. Merit Goods – Under‑Consumption

Definition & examples

• Goods/services that generate positive externalities or are socially desirable.
• Examples: primary & secondary education, vaccinations, early‑childhood care, public libraries.

Market outcome

Because individuals ignore the external benefit, the market equilibrium is at Q_m where MPB = MPC. The socially optimal quantity Q* satisfies MSB = MSC with MSB > MPB.

Measurement indicators used in data‑response questions:

• School enrolment rates (percentage of eligible children).
• Vaccination coverage (e.g., % of population receiving MMR).
• Library membership per 1,000 residents.

Government measures

1. Subsidies or vouchers: Lower the price faced by consumers, shifting MPB upward toward MSB.
2. Free provision: State supplies the good directly (e.g. free school meals).
3. Compulsory attendance / legal requirement: Ensures a minimum level of consumption (e.g. compulsory schooling until age 16).
4. Information campaigns: Highlight benefits to increase perceived private benefit.

5. Demerit Goods – Over‑Consumption

Definition & examples

• Goods/services that generate negative externalities or are socially undesirable.
• Examples: tobacco, alcohol, sugary drinks, illegal drugs, polluting fuels.

Market outcome

Private marginal cost (MPC) is lower than the true marginal social cost (MSC) because external costs are ignored. The market quantity Q_m where MPB = MPC exceeds the socially optimal quantity Q* where MSB = MSC (with MSC > MPC).

Typical quantification of social cost (useful for AO2/3):

• Health‑care expenditure per smoker (e.g., £2,500 / year).
• Productivity loss from alcohol‑related absenteeism.
• Environmental damage cost per tonne of CO₂ emitted.

Government measures

1. Excise / sin taxes: Raise the price, shifting MPB downward toward MSC.
2. Regulation or bans: Restrict supply or use (age limits, advertising bans).
3. Public‑health information: Campaigns to raise awareness of harms.
4. Subsidies for healthier substitutes: Encourage consumption of lower‑risk alternatives.

6. Price‑Control Motives

Price ceiling (maximum price)

• Goal: protect consumers from excessively high prices (e.g. rent caps, essential food items).
• Effect: price set below market equilibrium → quantity demanded ↑, quantity supplied ↓ → shortage.
• Side‑effects: black markets, reduced quality, under‑investment in supply.

Price floor (minimum price)

• Goal: protect producers or ensure a living wage (e.g. minimum wage, agricultural price supports).
• Effect: price set above equilibrium → quantity supplied ↑, quantity demanded ↓ → surplus.
• Side‑effects: unemployment, excess inventory, need for government purchase or storage.

Buffer‑stock schemes (price‑control tool)

• Used mainly in commodity markets (grain, oil) to stabilise prices.
• Government buys excess when price falls below a target (building a buffer) and sells when price rises above the target.
• Intended effect: reduce volatility, protect producers and consumers.
• Possible side‑effects: fiscal cost, risk of mis‑management, market distortion if the buffer becomes too large.

7. Methods of Government Intervention – Summary Table

Method	Intended Economic Effect	Typical Example	Possible Side‑effects / Limitations
Direct provision	Supply the good at the socially optimal quantity (MSB = MSC).	National defence, street lighting, public hospitals.	Fiscal burden, risk of inefficiency, political interference.
Subsidy (per‑unit)	Raise private marginal benefit to equal MSB; increase quantity demanded.	Education vouchers, renewable‑energy feed‑in tariffs.	Government expenditure; possible over‑supply if set too high.
Tax (indirect / excise)	Raise private marginal cost to equal MSC; reduce quantity demanded.	Cigarette duty, carbon tax.	Regressive impact if not offset; black‑market activity.
Price ceiling	Protect consumers by keeping price below equilibrium.	Rent control, maximum price for essential medicines.	Shortages, reduced quality, emergence of black markets.
Price floor	Protect producers or ensure a minimum wage.	Minimum wage, agricultural price support.	Surpluses, unemployment, need for buffer‑stock purchases.
Buffer‑stock scheme	Stabilise commodity prices by buying low and selling high.	Grain reserves in developing countries.	Fiscal cost, risk of market distortion, storage losses.
Information provision	Correct information asymmetry; shift MPB or MPC toward MSB/MSC.	Food‑labeling, anti‑drug campaigns, vaccination awareness.	Effectiveness depends on public responsiveness; may need complementary policies.
Regulation / mandates	Compel provision or restrict use of a good.	Compulsory schooling, seat‑belt laws, emission standards.	Enforcement costs; may reduce consumer choice.
Public‑private partnership (PPP)	Combine public funding with private‑sector efficiency.	Privatised water supply with government oversight.	Complex contracts; risk of profit‑driven under‑service.
Administrative cost & political feasibility	Assess whether the policy can be implemented efficiently and gain public/political support.	Cost‑benefit analysis of a new tax; parliamentary approval for a PPP.	High administrative overheads; opposition from interest groups; feasibility constraints.

8. Evaluation Checklist (AO3)

• Identify the type of market failure (public‑good, merit, demerit, price‑control motive).
• State the relevant marginal condition for efficiency (MSB = MSC or MPB = MPC).
• Choose the most appropriate government tool(s) and explain how it moves the market toward the efficient outcome.
• Analyse likely side‑effects:
  • Dead‑weight loss or unintended market distortions.
  • Equity impacts (distribution of costs/benefits).
  • Administrative costs and political feasibility.
  • Possibility of government failure (budget constraints, rent‑seeking).
• Consider alternative policies and the trade‑off between efficiency and equity.

9. Suggested Diagram for Examination

Draw a single graph with:

• Vertical axis: “Marginal Benefit / Cost”.
• Horizontal axis: “Quantity”.
• Three curves:
  • MPB – dashed downward‑sloping (private benefit).
  • MSB – solid line above MPB (includes external benefit).
  • MPC = MSC – solid upward‑sloping (private and social cost coincide for most public‑good examples).
• Mark the market equilibrium Q_m (MPB = MPC) and the socially optimal equilibrium Q* (MSB = MSC).
• Shade the dead‑weight loss triangle between the two equilibria.
• Label the effect of a chosen policy (e.g., a per‑unit subsidy shifts MPB up to MSB, moving the equilibrium from Q_m to Q*).