Market failure: public goods practice questions.

A merit good is best described as one that is

• over-consumed and yields external costs
• under-consumed, yielding external benefits
• always provided free by the government
• non-rival and non-excludable in consumption

Answer: under-consumed, yielding external benefits

Merit goods (e.g. education, healthcare) generate positive externalities and are under-consumed by the free market; governments often subsidise or provide them.

Which pair of characteristics defines a pure public good?

• Rivalrous and excludable
• Non-rivalrous and non-excludable
• Rivalrous and non-excludable
• Non-rivalrous and excludable

Answer: Non-rivalrous and non-excludable

A pure public good is non-rivalrous (one person's use does not reduce another's) and non-excludable (non-payers cannot be prevented from benefiting).

The free-rider problem arises primarily because a public good is:

• non-excludable, so people can benefit without paying
• non-rivalrous, so it becomes congested when many people use it
• provided by the government at a price of zero
• a good whose consumption imposes costs on third parties

Answer: non-excludable, so people can benefit without paying

Since non-payers cannot be excluded, rational consumers wait for others to pay — so willingness to pay is never revealed and private provision collapses.

Which of the following comes closest to being a pure public good?

• A toll motorway
• Fish stocks in the open ocean
• Coastal flood defences
• A cinema screening

Answer: Coastal flood defences

Flood defences protect every resident whether or not they pay, and one household's protection does not reduce another's — non-excludable and non-rivalrous.

A good is described as non-rivalrous when:

• it is impossible to prevent non-payers from consuming it
• its production creates benefits for third parties
• it is supplied to consumers at a price of zero
• one person's use does not reduce what is left for others

Answer: one person's use does not reduce what is left for others

Non-rivalry means consumption is not competitive: an extra user can benefit without diminishing anyone else's consumption. Being unable to stop non-payers from consuming describes non-excludability, not non-rivalry.

A quasi-public good is best described as a good that:

• has public-good traits only partly, like a congestible toll road
• is fully non-rivalrous and non-excludable under all circumstances
• is produced jointly by households and private firms
• is rivalrous and excludable but heavily subsidised by the state

Answer: has public-good traits only partly, like a congestible toll road

Quasi- (impure) public goods sit between private and pure public goods: they are partly rivalrous and/or partly excludable, like roads, parks or beaches.