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12 Nov

Posted at 21:45h in Uncategorized by

A private good is one that has the characteristics of both rivalry and excludability. Since it is rival, the consumption by one would deprive the consumption by another. For instance, when a vacancy in the school is filled up, there is one place less for potential applicants, as the same place cannot be offered to someone else. Moreover, since the good is excludable, it is not prohibitively costly to confine the benefits to a selected group of people. Using the same example, a person who is not willing to pay or who does not meet the minimum grade requirement can easily be excluded from attending the school.

On the other hand, a public good is one that has the characteristics of non-rivalry and non-excludability. Examples of such goods are national defence and flood control. Non-rivalry in consumption means the consumption by one person need not diminish the quantity consumed by anyone else given the level of production. Consider the example of national defence, once an armed force is built, the same amount of protection to the citizens will not be reduced when there are new citizens. Non-excludability means it is impossible, or prohibitively costly to confine the benefits of the good once produced to selected persons. Using the same example, it is not possible to confine the benefits of protection from missile attack from people living even within miles away.

A private good is different from a public good based on the rivalry and excludability in consumption. As a public good is non-rival, this implies that marginal cost of serving an additional user is zero. The non-excludability of public good implies that free-rider problem will arise. Thus, a public good must be provided by the government. However, a private good can be provided by private enterprises as well as the government.

12 Nov

Posted at 21:29h in Uncategorized by

A private good fulfills the characteristics of rivalry and excludability. Rivalry in consumption means that consumption of a good by an individual will reduce the availability and the amount for consumption by other individuals. Excludability in consumption means that consumption of a good can be excluded if the individual does not pay.

An example of a private good is a can of drink. If a can of drink is consumed by one, someone else is deprived of the same can of drink and will not be able to quench his thirst. This shows that the consumption of the can of drink is rival. At the same time, the can of drink is excludable. This means that consumers who do not pay for the can of drink will not be able to enjoy it. In reality, there are countless examples of private goods and services such as computers, cars, food & beverages, haircutting services and tour services.

12 Nov

Posted at 21:23h in Uncategorized by

Why is economic growth important to an economy?

The greatest benefit of economic growth is a rise in the living standards. This is provided economic growth exceeds population growth, real GDP per capita will rise  a higher level of consumption of goods and services.

Rapid economic growth rate makes it easier to redistribute income to the poor (lower income group). When there is economic growth  income rises, the government can redistribute income from the upper income group to the lower income group without the need to raise tax rates, i.e. without penalising the
high income earners  the rich pays more taxes. In addition, economic growth  firms’ profit level rises  pays more corporate tax  a positive effect on government finances  boosting tax revenues and providing the government with extra funds to spent on programmes to alleviate poverty and close the income gap between the rich and poor.

 

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12 Nov

Posted at 21:08h in Uncategorized by

Cigarettes is a type of demerit good as it exhibits negative externalities from consumption. They are deemed to be socially undesirable. Negative externalities refer to incidental costs to third parties that are not taken into account by those who are involved in the activity.

A smoker will only take into account his private costs (price of the packet of cigarettes and own smoking-related health problems) and private benefits (satisfaction derived from smoking).

However, he does not consider the negative externalities that would be generated by his smoking (smoking-related health problems on passive smokers, costs incurred to society for having to provide healthcare for smoking-related health problems as well as clearing and maintenance costs for the litter).

The social cost from undertaking the activity is the private cost faced by the smoker as well as external costs accruing to third parties. Negative externalities will lead to divergence of private cost and social cost. With the presence of negative externalities, social cost will be greater than private cost.

Market failure is likely to exist because the negative externality is underpriced by the price mechanism. If cigarettes were provided through the free market, social costs of smoking exceed the private costs. Private optimum occurs at Qe where PMB (the benefit to the individuals of smoking the last unit of cigarette) equals PMC (the cost to the individual of smoking the last unit of cigarette).

The socially efficient level is where SMC=SMB i.e. at output Qs. Therefore, there are too many scare resources devoted to the consumption of cigarettes. There will be over-consumption of cigarettes because society values an extra unit of cigarette less than what it would cost society to produce it. Shaded area represents the welfare loss to society as a result of this over-allocation of resources. Society as a whole could be made better off if the current level of cigarettes were reduced to socially efficient level. (Qs)

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