No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Thirteen: Market “Failure” and the Role of the Government 312 If you get into the car and turn on the radio to an AM or FM channel, you hear music or talk radio. If someone provides an FM signal to you, there is no way that I cannot receive the signal as well—it is non-excludable. You listening to the radio does not preclude my consumption as well—it is non-rivalrous. Thus, radio meets our strict definition of a public good, yet it is usually a private service. Why is that? Well, Christian radio stations often have pledge drives (as does your local public television station) and rely on people choosing to “do the right thing.” The success of these stations suggests that voluntary contributions are possible for a truly valued product. But the main mechanism for overcoming the free rider problem is with advertising; listeners wouldn’t pay directly, but indirectly through their purchases of goods and services they hear about through the radio. Further, technology allows increased specialization and improvements that can overcome the free rider problem, such as with satellite radio and TV where the good can be restricted to only those who pay. Other types of voluntary arrangements can overcome the free rider problem, such as community covenants which maintain certain levels of services within a community. If you don’t want to pay for the services, you don’t move into that community. A final and very important note about public goods: just because something is currently provided publicly does not make it a public good—it must have the characteristics of non-excludibility and non-rivalrousness in consumption. So, is public education a public good? How about the provision of money by the Federal Reserve? The answer to both of these questions is no; make sure you understand why. Carefully think through the application of the two characteristics of a public good to these services. This doesn’t necessarily mean that government shouldn’t provide services that are not technically defined as public goods, but it does mean that we cannot use the rationale that markets cannot provide these services therefore the government must. LACK OF COMPETITION When we covered monopoly and oligopoly in an earlier chapter, we learned that producers might be able to increase profits by restricting output. In those market structures, the marginal cost to produce additional units is less than the benefit that consumers would receive, as in Figure 13.8 . Thus, expanding output until the marginal benefit of the consumers equals the marginal cost of producers would increase allocative efficiency. Markets are said to “fail” since they do not produce this level of output. In chapter 14 we’ll explore some reasons why government action to correct this might not work well, but let’s first think about why we might be happy with monopoly profits and allocative inefficiency. Public goods: just because something is currently provided publicly does not make it a public good—it must have the characteristics of non-excludibility and non-rivalrousness in consumption.