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Economics Policy Public Goods - Essay Example
This paper explores three related questions about price-excludable public goods, or merit goods. All the three questions are explained in detail and the second question is carefully explained through a diagram of marginal social and private benefit.
Education is a mixed good, which is non-rivalrous in nature, but can be excluded by setting a price…
If education is provided by the private market alone, it would result in imbalance, and hence, the market mechanism would not be able to match demand and supply. The reason for this is the fact that private forces are not concerned with the public interest; they are concerned about their own returns and nominal benefit. Therefore, the private market forces will only produce those goods which would lead to maximum profits. The private market forces ignore social costs and benefits, and therefore, will not produce the optimal quantity of merit or price-excludable public goods.
Education would be under-produced by the private sector. All merit goods are considered good for the people, and the government desires to provide them in abundance. Merit goods have more social benefit than private benefit. Therefore, the private sector would not provide them optimally. Education has large external benefits relative to private benefits, that is, social benefits are greater than private benefits. Under the price mechanism, there would be few firms willing to provide education, and they would charge high prices. High prices would reduce consumption because some or many people might not be able to afford education. ...