Any commodity or service that any organization, individual, or government provides to the public for free without any profit is called a public good. In most cases, the government pays for these kinds of services using public taxes.
However, economists do not consider all goods financed through taxes as public goods. To them, any product that contains the two following characteristics is good enough to include in this category:
Therefore, to define any commodity or service as a public good, you must ensure that they fulfill the two essential traits.
A public good is non-excludable because the public can use the service regardless of whether they pay for it or not. No one can be excluded from using the service based on any form of discrimination as well.
On top of this, a public good is also non-rivalrous. It means that when one person uses a public good, it does not stop another from using it. These services do not dwindle in supply no matter how many people use them.
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When there is an insufficient distribution of goods and resources in the free market, the situation is termed a market failure. In any free market, the supply and demand of goods determine the prices. If there is more demand, then the price increases and vice versa. Thereby, the market maintains an equilibrium.
However, the problem arises when the supply of goods and services diminishes in comparison to the demand. Market failures occur when individuals or groups base their actions on self-interest and produce less than the optimum number of products. As a result, these individuals end up incurring too many costs or less benefit.
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Many causes can lead to market distortion and market failure when the supply cannot meet the demand. Let's look at some of these:
Externalities are the consequences of industrial or commercial activity that affect third parties without them consenting to be associated with the benefit or cost. Externalities can be of two types:
Public goods are non-excludable. Therefore, you will not be able to exclude anyone from using the services. These goods have a hand in market failure when some people who use the commodities or services do not pay for them. For example, everyone is entitled to enjoy the benefits of the police and army whether they pay taxes or not.
The monopoly of control happens when a single prominent seller controls the market and determines the price of the products depending on their whims. The seller might decide to sell the product at high costs to maximize the returns or control the availability of the product in the market to manipulate the demands.
This monopoly of control can happen from the buyer's side when one single large buyer exercises their dominance by determining what prices they are willing to buy the product.
Sometimes, market failure may occur when there is a lack of information between the buyer and the seller. As a result, the buyer cannot make an informed choice as they are not aware of the product's actual benefits. This can lead to inaccurate supply and demand.
Moral hazard occurs when individuals make risky decisions knowing that they will not be affected by the negative consequences of their choices. For example, when you do not have full insurance on your house, you will be more careful because you will have to incur the costs of any damage. However, when your house is fully insured, you will feel less responsible for taking care of the place as someone else will compensate for the loss.
These are some of the leading causes of market failure that you can study for your assignment. On top of this, you also have macroeconomic stability, factor immobility, principle-agent problem, and other causes that can also lead to market failure.
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If you look around your environment, you'll notice that you use many public goods in your daily life. Let's look at five such examples:
Streetlights are one of the best examples of public goods. It is both non-rivalrous in consumption and non-excludable. Everyone enjoys the light regardless of whether they pay taxes or not, and many people can use it at once.
Lighthouses help to show the path to ships and assist them in navigating through rocky waters. These lighthouses do not pick and choose which ship gets to take advantage of its light. It shines equally for everyone. As a result, it is a textbook definition of a public good.
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There are many examples of market failure that you can study to understand the phenomenon better. Let's have a look at two such examples.
Air pollution is a textbook example of negative externality where the external cost is not reflected in the products that increase air pollution. However, the third parties have to bear that cost to survive in low quality air.
There is a market failure when the companies fail to establish the actual cost of their products to the consumers. For example, in the case of smoking, the consumers do not understand the true cost of the products, which can give them lung cancer.
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