Analysis of Various Public Goods, Externality, or Free Rider Problems - Essay Example

Public Goods and Externalities Introduction Public goods are fundamental valuables that are designed to provide immense positive impact to the economic wellbeing of individuals. The contribution of public goods in ensuring economic sustainability cannot be ignored in any environment. They are unique commodities whose production and the level of externalities cannot be managed through marketplace interventions. The key provider and controller of the goods is the government due to the heavy cost involved in their actualization. Examples of public goods include but not limited to roads, knowledge, street lighting, research and development, national security, and flood control systems. The goods are divided into two aspects that include non-excludable where individuals usage of a product cannot be excluded, and non-rivalrous where individual’s usage of a product present no effect to its availability to others. Ideally, the intensity with which public goods are used influences the level of externalities imposed on users. For instance, excessive use of public goods results in serious negative externalities or spillover costs, while favorable usage of the products always leads to positive externalities. By definition, externalities occur when an individual’s wellbeing is affected by the actions of another, either directly or indirectly without a reflection of the relevant costs and benefits in market prices (Cowen 1). In simple terms, an externality occurs whenever an activity executed by an individual imposes spillover costs and social benefits on third parties who are not fully involved in the activity. Analysis of various public goods, externality, or free rider problems As noted, public goods are essential economic products whose consumption by an individual does not reduce the potential amount of availability to another party. The products determine the level of costs and social benefits individuals may face in the course of usage (Cowen 1). The two aspects of public goods that include non-excludability and non-rivalrous explains the extent in which individuals cannot be excluded from a product, and the scope to which an individual’s usage of a product does not reduce the chances of consumption by another person respectively. For example, non-excludability aspect of public goods is evident when a businessperson stages a promotional show in an open place that is accessible to people through windows or other openings, the people will have the opportunity of watching what transpires (Cowen 1). However, because no fee cannot be charged for consumption, the production of the show may be terminated even if the demand is high. On the other hand, a non-rivalrous entrepreneur can exclude non-contributors from watching a show or perhaps organize a field where watching can be done at a fee. The practice is charged, and those unwilling to pay will be excluded from watching the show. Notable examples of public goods that are widely used include roads, national security/defense, street lighting, knowledge, and research activities. Others include public fireworks, lighthouses, free air, environmental goods, and information goods such as an invention. The non-rivalrous goods include law enforcement, libraries, museums, and streets. The goods are imperative in the economic world since everyone is involved in their consumption (Chander, Drèze, Lovell and Mintz 125). For instance, the majority in diverse settings use non-excludable public goods. Standard example of a public good is a road network that is used inclusively by most individuals. No one is excluded from the usage of roads given that its diminishing effect does not hinder other individuals from using the same services. The provision of a lighthouse is another perfect public good in consideration that excluding ships from using its services is extremely difficult. The benefits gained from a lighthouse usually accrue to particular ports using ships. The benefits accruing from the fees have been sufficient in funding the maintenance activities of lighthouses (Block 38). Another example of a perfect public good is a national security or defense. National safety is a public good since its achievement involves everyone by exerting effort towards defending the nation. The benefits of this effort are distributed to the millions of people hence an individual achieves minimal benefit. As much as national defense is about securing the nation and the people, security officers cannot be excluded from the benefits accruing out of national duty regardless of active participation or not. Despite the nobleness of the public goods, there are various externalities and free rider problems associated with them. The externalities or free rider problems determine the net level of costs and social benefits third parties accrue. According to Chander et al, (126), the externality problems are normative claims that are traceable from normative theories that economist rely on or use. The externalities cause either positive or negative spillover’s depending on the prevailing circumstances and policies adopted. In most instances, negative externalities that lead to diminished social benefits and free rider problems outweigh positive externalities. The imbalance is eminent in various settings since the marginal production costs is equivalent to marginal social benefits of engaging in an activity. The equilibrium equation adopted in most economies stands is given below. MB^A + MB^B = MC. Extreme level of interest is what causes negative externalities or free rider problems in various locations. Therefore, the main problem that leads to negative externalities or inferior maximization of social benefits is the overriding interest of service providers. The service providers focus more on acquiring maximum advantages in both costs and social aspects given that they determine the margins of benefits. For instance, most manufacturers within the environmental economies neglect the spillover costs associated with the waste materials they remit. Likewise, governments also focus on their interest by ignoring various spillover costs associated with the cleanup regulations enforced on firms. Another problem is the uncontrolled level at which the activities that maximize social net benefits capacities are executed (Block 42). The low or high level of activity determines the externality levels in most settings. For instance, water pollution is instigated by the intense remission of waste materials and chemicals to the water streams. The increase of activity in the industries has a direct effect on the amount of wastes released hence increase pollution levels. Water and air pollution due to heightened activities in industries impose immense costs on other users. For example, the diagram below shows how intense activity of the company A that polluted a river thereby causing harm to company B’s fishing firm. P MSC P MC MD X1 x2 X P – Represent market price for A’s product MD – marginal damage caused to B’s firm MC – A’s private marginal costs MSC – marginal social costs (MC + MD) The public policies that can be used in reducing the problem To correct the externality problems or free rider complications that contribute to market failure including minimal social benefits to the third parties within an economy, effective economic sustainable strategies must be put in place. Conventional policies that promote economic equality and elimination of activities that encourages negative externalities should be adopted. The first public policy necessary is for the government to declare third party’s social benefits as supreme compared to that of producers of public goods (Cowen 1). The declaration would foster a paradigm shift on the interest levels that public goods manufacturer’s exhibit in their activities. Likewise, regulatory policy on enforceability of the law compelling industries to be accountable for waste emissions is suitable. Such a regulation would ensure that companies do not emit large volumes of waste materials into the atmosphere to prevent pollution. Equally, a policy guideline or strict penalties to those who contaminate the environment should be put in place. In this case, companies intending to produce waste materials should be compelled to compensate the affected people for their privileges (Chander et al, 136). A complete review of taxation policies and requirements is another viable strategy that governments can adopt to correct the market failures. Taxation creates a deadweight loss to the institutions producing public goods that in turn leads to reduced social net benefits to third parties. Therefore, reduction of tax obligation is vital in facilitating significant increase in social benefits accrued by third parties. P MSC P MC +t MC MD X1 x2 X The diagram shows the effective balancing of the externalities between third parties and producers of public goods. The tax adjustment must be equivalent to the existing difference between the MSC of the producer of externalities and MC of the third party. For instance, to the MD that is (equated at the social optimum). The tax reregulation imposed forces the production institutions to neutralize their external effects. The government can also adopt subsidy policy to correct the market failures by bridging the gap created by increased cost of production in enabling increased social benefits that third parties acquire. The politically feasible reforms The most politically feasible reforms that governments should pursue in increasing the social benefits third parties enjoy as they use public goods is the reduction of tax obligations, privatization of key services and development of an subsidy policy guideline (Block 88). Developing a favorable tax law is a politically feasible approach given that politicians work is to debate and pass laws. The political leaders are the ones with the legislative powers of making, amending and passing laws as they deem necessary. Therefore, their involvement in the processes of changing the tax law, improving subsidy policy, authorization of privatization among other contractual agreements, is well positioned (Cowen 1). This is because they are the representatives of the public. Subsequently, they fight for the rights of the public by ensuring that they achieve livable life. In this regard, they will not hesitate to pass any bill seeking to reduce the cost incurred by third parties as they use public goods. Conclusion Indeed, public goods are fundamental valuables that provide immense positive impact to the economic wellbeing of individuals. The products are vital to ensuring sustainable empowerment of individuals. The public goods are characterized by their non-diminishing nature in terms of amount and quality including availability to individuals inclusively. They are easily shared given that their existence influences human activities. Works Cited Block, Walter. Public Goods and Externalities: The Case of Roads. The Journal of Libertarian Studies. Vol, 7 no (1): 1983. 36-345. Chander, Parkash., Drèze, Jacques., Lovell, Knox and Mintz, Jack. Public Goods, Environmental Externalities and Fiscal Competition: Selected ...New York NY: Springer Science & Business Media, 2007, Print. Cowen, Tyler. Public Goods and Externalities. 2014. Web. 23rd Mar. 2003. Read More