Market failure and analysis of failure reasons to correct it.pptx

Market failure and ways to correct failure through government intention

1. TOPIC 6.3 MARKET FAILURE AND PIBLIC GOODS -BY CA,CS, LLB DISHA KALRA

2. LEARNING OBJECTIVES WHEN DOES THE SITUATION OF MARKET FAILURE TAKE PLACE DEFINE THE TERMS PUBLIC GOODS, NON –RIVALROUS AND NON-EXCLUDABLE EXPLAIN PUBLIC GOODS AS BEING NON - –RIVALROUS AND NON-EXCLUDABLE AND SUBJECT TO FREE RIDER PROBLEM EVALUATE GOVERNMENT INTERVENTION TO PROVIDE PUBLIC GOODS THROUGH DIRECT INTERVENTION OR CONTRACTING OUT TO PRIVATE SECTOR

3. WHEN DOES THE SITUATION OF MARKET FAILURE TAKE PLACE The following factors contribute to market failure: Externalities: Definition: Externalities occur when the production or consumption of a good or service affects third parties not directly involved in the market transaction. Example: Negative externalities like pollution as the social cost or benefit is not reflected in market prices. Public Goods: Definition: Public goods are characterized by non-excludability and non-rivalry , making it challenging for the market to provide them efficiently. Example: National defense or street lighting are public goods that might be underprovided by the private sector due to the free-rider problem.

4. Imperfect Competition: Definition: Imperfect competition, including monopoly power, can result in distorted prices and quantities compared to a perfectly competitive market. Example: Monopolies may set prices higher than in a competitive market, leading to allocative inefficiency. Incomplete Information: Definition: In situations where buyers or sellers lack complete information, market outcomes may not reflect true preferences and lead to suboptimal resource allocation. Example: Asymmetric information in markets such as healthcare or financial services may result in adverse selection or moral hazard problems.

5. DEFINE THE TERMS PUBLIC GOODS, NON –RIVALROUS AND NON-EXCLUDABLE Public Goods: Definition: Public goods are goods or services that are characterized by two main features - non-rivalrous consumption and non-excludability. These characteristics make it difficult for private markets to efficiently provide them. Examples: National Defense: The protection provided by a country's military benefits all citizens, and one person's protection does not reduce the protection available to others. Street Lighting: Illuminating public spaces benefits everyone in the vicinity, and one person enjoying well-lit streets doesn't diminish the lighting for others.

6. CONTINUED… Non-Rivalrous: Definition: Non-rivalrous refers to the characteristic of a good or service where one person's consumption does not reduce the quantity available for others. Example: Public Parks: The enjoyment of a public park by one person doesn't reduce the availability of the park for others.

7. CONTINUED.. Non-Excludable: Definition: Non-excludable means that it is difficult or costly for a producer to prevent individuals who have not paid for a good or service from consuming it. Examples: Air Quality: It's challenging to exclude individuals from enjoying clean air if it's provided as a public good. People benefit from clean air regardless of whether they contribute to its maintenance. Public Broadcasts: If a television station broadcasts a program, it's typically challenging to exclude individuals who haven't paid for it from watching, example the inauguration of Ram Mandir

8. CONCLUSION In summary, public goods are characterized by being non-rivalrous (consumption by one doesn't affect others) and non-excludable (difficult to exclude individuals from benefiting). These characteristics often create challenges for the private market to provide such goods efficiently, leading to potential market failure, and often necessitate government intervention or alternative mechanisms for their provision.

9. EXPLAIN PUBLIC GOODS AS BEING NON - –RIVALROUS AND NON-EXCLUDABLE AND SUBJECT TO FREE RIDER PROBLEM The presence of these features gives rise to a phenomenon known as the "free rider problem." Let's break down each component: Non-Rivalrous Consumption: Definition: Non-rivalrous consumption means that the consumption of a good or service by one individual does not reduce its availability or diminish its utility for others. Example: Consider a public firework display. The enjoyment of one person watching the fireworks does not diminish the enjoyment of others during Diwali. The spectacle is non-rivalrous in nature.

10. CONTINUED… Non-Excludability: Definition: Non-excludability means that it is difficult or costly for a producer to prevent individuals who have not paid for a good or service from benefiting from its consumption. Example: Think of a lighthouse's beam that provides navigation assistance to ships. It's challenging to exclude ships that haven't paid for this service from benefiting as the light is accessible to all passing vessels. Free Rider Problem: Definition: The free rider problem arises when individuals can benefit from the consumption of a public good without contributing to its provision. Because of non-excludability, people can enjoy the benefits of a public good even if they haven't paid for it. Example: Suppose a town decides to provide street lighting for improved safety. Since the light is non-excludable, residents who haven't contributed to its cost still benefit from the illuminated streets. They become "free riders" enjoying the good without contributing financially.

11. CONTINUED… Implications of the Free Rider Problem: Underprovision : Due to the free rider problem, private producers may be reluctant to supply public goods because they cannot easily charge consumers for the benefits received. Market Failure: The free rider problem is a form of market failure where the private market does not efficiently provide public goods. This is because producers have difficulty recovering the costs associated with producing the good or service.

12. CONTINUED… Solutions to the Free Rider Problem: Government Intervention : Governments often step in to provide public goods as they can collect funds through taxation, ensuring that everyone contributes to the provision of these goods. Quasi-Public Goods: Some goods, while not fully public, may exhibit characteristics of both public and private goods. For example, toll roads can exclude non-payers, making them excludable to some extent.

13. EVALUATE GOVERNMENT INTERVENTION TO PROVIDE PUBLIC GOODS THROUGH DIRECT INTERVENTION OR CONTRACTING OUT TO PRIVATE SECTOR E valuating government intervention to provide public goods through direct provision or contracting out to the private sector involves considering the advantages and disadvantages of each approach. Let's assess both methods: I- Direct Government Intervention: Advantages: Public Goods Provision: Governments can directly provide public goods, ensuring their availability to all members of society. This is crucial for goods with non-excludable and non-rivalrous characteristics. Equity: Direct provision allows the government to ensure that public goods are distributed fairly, minimizing disparities in access and benefits. Control and Accountability: Governments have direct control over the provision process, enabling them to set standards, monitor performance, and be accountable to the public.

14. CONTINUED… Disadvantages: Inefficiency: Direct provision by the government may lead to inefficiencies, as public agencies may not operate as efficiently as private entities due to bureaucracy and lack of profit motives. Resource Constraints: Governments may face budget constraints, limiting their ability to allocate resources efficiently for public goods provision. Political Influence: Decisions on public goods provision may be influenced by political considerations rather than economic efficiency, potentially leading to suboptimal outcomes.

15. CONTINUED… II Contracting Out to the Private Sector: Advantages: Efficiency: Private firms often operate more efficiently and have profit motives, potentially leading to cost savings and improved service delivery. Innovation: Private firms may bring innovation and competition, fostering better ways of providing public goods. Risk Transfer: Contracting out can transfer risks and responsibilities to private entities, reducing the burden on government resources.

16. CONTINUED… Disadvantages: Profit Motive: Private firms may prioritize profit over societal welfare, potentially leading to undersupply of public goods or compromising quality. Equity Concerns: Contracting out may lead to unequal access to public goods, as private firms may prioritize areas with higher profitability. Limited Accountability: Private firms may not be as accountable to the public as government agencies, potentially leading to issues of transparency and public interest.

17. EVALUATION The choice between direct government provision and contracting out depends on the specific context and the characteristics of the public goods in question. A balanced approach, considering efficiency, equity, and accountability, is often necessary. For instance, governments may choose to contract out when efficiency gains are substantial, but they must carefully monitor and regulate private providers to ensure public interest is safeguarded.

18. THANK YOU