4TH

CHAPTER

PUBLIC PROVISION FOR SOCIAL GOODS

A. Social Goods & Market Failure:

B. Provision for Social Goods:

C. Mixed Goods:

D. Giving as a Social Goods:

E. Merit Goods:

In the market economy Consumer must be bid for what they wish to buy and must thus reveal their preferences to produce. Producer, in trying to maximize their profits, will produce what consumer want to by and will do so at least cost.

In reality, various difficulties arise. imperfect competition, production may be decreasing cost, Consumer may lack of information.

First : “Externalities” where consumption benefits are shared & cannot be limited to particular consumer, or where economic activity results in social cost which are not paid for by the producer or the consumer who paid cause them.

Second: market can respond only to the effective demands of consumer as determined by the prevailing state of “Income Distribution”,

Third: Unemployment, Inflation and Economic Growth.

The market can function only in a situation where the “exclusion principle” applies is excluded. Exchange cannot occur without property rights and property rights require exclusion.

This process can function in a market for private goods- for Food, Clothing, Housing,

Exclusion is inappropriate in the case of social goods because their consumption is Nonrival.

Nonrival Consumption: consumption of the good by one person does not preclude consumption by a second person.

Example, Benefits provided by national defense or by measures to prevent air pollution. Exclusion would be impossible and moreover inefficient.

No excludable: Consumption of public goods is No excludable. This means that everybody can consume the product whether they paid for it or not.

Example:- The locale public Broadcasting System radio station claims that only one of 13 listeners actually pays(i.e,contributes to) the station. Likewise, most college student don’t pay taxes in their local community but still use the “Services” of the local constabulary.

Although the features of Nonrival consumption & Nonexcludabllity need not go together, they frequently do. In these instances for example, Air purification, National defense, Street lights,---exclusion both cannot and should not be applied. Both causes of market failure overlap, it may be futile to ask which is the basic cause. However, the Nonrival nature of consumption might be considered as such, Since it renders exclusion undesirable (inefficient) even if technically feasible.

Feasible Not Feasible

Rival 1 2

Nonrival 3 4

Two main issues arise due to non-rival nature of social good consumption:

What constitutes efficient resources allocationThe procedure by which their provision is to be

achievedFirst issue is explained through “comparison

with private goods” and second one via “budgetary provision”

In order to clarify the problem 1, we refer to the demand and supply mechanism for private goods.

On same basis, we derive the allocation mechanism for social goods as well.

Now compare and contrast of these two situations enables us to distinct the social goods with private one.

After graphical explanation, we conclude that for private goods, efficiency requires equality of Marginal benefits of each individual with MC while in case of social goods, the sum of MB should equal MC.

Provision of social goods through market mechanism is misleading as difference in efficiency conditions arises due to following factors;

1. Consumption is non-rival2. Exclusion is not feasible

Thus consumer does not reveal his preference through bidding.

Due to large number of participants, everyone try to act as free rider

Alternative process of provision of social goods is political one through:

Obtaining the revelation of preference from general public

To furnish it with the fiscal resources needed to pay for them

The preference can be accomplished in efficient manner via political process of voting on tax and expenditure decision.

Another allocative method is representative democracy

Between the extremes of purely private and purely social goods are noted in mixed situation.

Such mixed cases include private goods which generate benefit or cost externalities

Suppose by getting educated A is not only derives personal benefits but also makes it possible for other to enjoy with more educated community.

As being large number of other consumer may be affected so budgetary process will again be needed to serve preferences.

•The correct budgetary intervene will not involve full budgetary provision in this case. so it will take the form of subsidy to private purchases.

Private consumption or production activities may generate costs which are not paid for by consumer and producer.

Preferences revelation is difficult because absence of exclusion.

Individual contribution seems to be a small fraction of tax accumulated funds.

External benefit may come in situation in which only small number conditions are involved, although provision of social goods occurs most important in a large number setting.

Suppose an airplane flying at night over a city, or a chimney causing air pollution both situation external cost may impose on many people. yet it is impracticable for each of them to negotiate with the offender.

Under certain circumstances the market is ready for generating an efficient provision of social goods without involving a budgetary process

Another case of mixed goods arise where goods are not Nonrival in consumption even through they are consumed in equal amount by all member of particular group.

The spatial benefits area is limited for most social goods and the members of the group are thus confined to the residents of that area.

A group which is sufficiently large to require provision for social goods by political process need not be all inclusive

Simultaneously the feature of spatial limitation of benefits is central to the application of social goods theory to local government

Satisfaction of some wants either through the purchase of private goods or provision of social goods

Where particular needs may be met by alternative modes of public or private provision

It is of interest in relation to transfer.

Suppose that 1 person or Govt. giving to 2 person. it is based on 1st person’s desire to see 2nd person position to improved.1st person until desired equal satisfaction from similar giving by C and D

Giving in this may generates externalities not only for the receiver but also for other who see his position improved.

In the Govt. provision t is giving taxing and transfer payment of taking by hose who benefits.

The premise that private and social wants are experienced by individuals rather then group entities is quite accord with the notion that individuals do not live in isolation but in association with other. (wants was based on Nonrival nature of consumption and not being applicable of exclusion)

The social goods may be noble as carry high culture or aesthetic values such as everyday needs (roads and fire protection)

The private goods may be noble as satisfy cultural needs such as everyday needs (bubblegum)

The social goods may be noble as carry high culture or aesthetic values such as everyday needs (roads and fire protection)

The private goods may be noble as satisfy cultural needs such as everyday needs (bubblegum)

The concept of wants based on the needs and preferences of individuals to held values of western culture.

The concept of communal based on the needs is hard to interpret.

The community interest give rise to communal wants, wants which are generated by and pertain to the welfare of the group as a whole

. There is community interest, an interest which is attributable to the community as a whole and which does not involve a “mere’’ addition of individual interest.

COMMON WANTS:A group of people share an historical experience or cultural tradition with which identify, thereby establishing a common bond.

Individuals will not only defend their home but will join others in defending their territory or in protecting their country, such common values and interest may give rise to common wants.

Whereas the theory of both social and private goods is based on the premise of consumer sovereignty, the role of community preference and of merit goods is noted