To correct the market failure associated with public goods, governments usually:?

Question

To correct the market failure associated with public goods, governments usually:

A. Hold a lottery in which firms are randomly designated as the only supplier of the public good

B. Use taxes or regulations to limit production of the public good

C. Provide the public good directly, paying for it out of tax revenues

D. Rely on the invisible hand to solve the problem through voluntary trade

Answer 1

The best answer is

C. Provide the public good directly, paying for it out of tax revenues

Note: Holding a lottery does not necessarily solve the problem as the winning firm may still need incentive to produce enogh quantity of public goods. In fact for many public goods, no private firm mat be willing to enter the lottery and make losses on the provision of public goods with the problem of free riders. You cannot ask private firms to provide defence services by selling such service in the market for individual citizens to buy. Taxes and regulations to limit the production of public goods does not make sense as social welfare increases only by producing enough public goods to meet the needs. You cannot tax or regulate a private defence services firm. There cannot be volantary defence service trade. While there can be market for private security services, national defence services are not possible to be bought anmd sold by the citizens in the market,

Common examples of public goods include: defense and law enforcement (including the system of property rights), public fireworks, lighthouses, clean air and other environmental goods, and information goods, such as software development, authorship, and invention. Some goods (such as orphan drugs) require special governmental incentives to be produced, but can't be classified as public goods since they don't fulfill the above requirements (Non-excludable and non-rivalrous.)

The provision of a lighthouse has often been used as the standard example of a public good, since it is difficult to exclude ships from using its services. No ship's use detracts from that of others, however, since most of the benefit of a lighthouse accrues to ships using particular ports, lighthouse maintenance fees can often profitably be bundled with port fees. This has been sufficient to fund actual lighthouses.

Technological progress can create new public goods. The most simple examples are street lights, which are relatively recent inventions (by historical standards). One person's enjoyment of them does not detract from other persons' enjoyment, and it currently would be prohibitively expensive to charge individuals separately for the amount of light they presumably use. On the other hand, a public good's status may change over time. Technological progress can significantly impact excludability of traditional public goods: encryption allows broadcasters to sell individual access to their programming. The costs for electronic road pricing have fallen dramatically, paving the way for detailed billing based on actual use.

If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. (Each of us are saved from our own individualistic short-sightedness, our tendency to be a free rider, while also being assured that no one else will be allowed to free ride). One frequently proposed solution to the problem is for governments or states to impose taxation to fund the production of public goods. This does not actually solve the theoretical problem because good government is itself a public good. Thus it is difficult to ensure the government has an incentive to provide the optimum amount even if were it possible for the government to determine precisely what amount would be optimum.

Sometimes the government provides public goods using "unfunded mandates". An example is the requirement that every car be fit with a catalytic converter. This may be executed in the private sector, but the end result is predetermined by the state: the individually involuntary provision of the public good clean air. Unfunded mandates have also been imposed by the U.S. federal government on the state and local governments, as with the Americans with Disabilities Act, for example.