Nova workboard

a blog from young economists at Nova SBE

What are the right policies to lead with Public Goods?

Public Goods is one reason for the State to intervene in the Economy, since it is a market failure that leads to inefficiency (the markets will not get an efficient solution by itself). By definition, one public good is characterized by: non-rivalry in consumption – one extra unit consumed by one additional consumer does not harm the others; impossibility of exclusion – these leads to the problem of free riding; non-excludability (only some authors consider this characteristic).

To solve the problem of Public goods the State can intervene in Economic or achieve private solutions. However, we need to have in attention that the efficiency is not the only problem related to public goods. Equity is a problem as well. If you think, for instance, in public transportations, there are different characteristics of the service, like the capacity in Lisbon and in Trás-os-Montes. Thus, if the solution is more specifically to a certain group, would be better for the economy (one example of solution is give more capacity expansion to one group and the cost will be fully supported by it. Is it true? Well, this will depends. If we have a small numbers of individuals/groups, decentralized efficient outcomes are possible, although we need to have in attention the incentive-compatible mechanisms of preference revelation.

Other point that is important to clarify is that, according Tyler Cowen (http://www.econlib.org/library/Enc/PublicGoods.html), we need to distinguish between the imperfections of the market solutions to public goods from the imperfections of government solutions. Both points produce inefficiency, but we cannot allow that politicians use public “goods” to serve their own interests rather than the interests of public. General, private solutions (if the numbers of individuals are relatively small) are usually more efficient than government solutions.

Concluding, there are no obvious solutions to solve the problem of Public Goods. However, we have mechanisms, like Peak-Loading mechanisms, that are design to create incentives to agents in order to adopt some behavior. Nevertheless, we cannot forget, in each circumstance, what are the real interests of the Government.

Pedro Luís Silva,

#87 Research Master in Economics

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Author: studentnovasbe

Master student in Nova Sbe

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