Reference no: EM13218514

by how much is the market a. Overproducing private goods? b. Underproducing public goods? Suppose that point A represents the optimal mix of private and public goods. It's the mix of goods and services we'd select if everyone's preferences were known and reflected in production decisions. The market mechanism won't lead us to point A, however, because the demand for public goods will be hidden. If we rely on the market, nearly everyone will withhold demand for public goods, waiting for a free ride to point A. As a result, we'll get a smaller quantity of public goods than we really want. The market mechanism will leave us at point B, with few, if any, public goods. Since point A is assumed to be optimal, point B must be suboptimal (inferior to point A). The market fails: we can't rely on the market mechanism to allocate enough resources to the production of public goods, no matter how much they might be desired. Note that we're using the term "public good" in a peculiar way. To most people, "public good" refers to any good or service the government produces. In economics, however, the meaning is much more restrictive. The term "public good" refers only to those nonexcludable goods and services that must be consumed jointly, both by those who pay for them and by those who don't. Public goods can be produced by either the government or the private sector. Private goods can be produced in either sector as well. The problem is that the market tends to underproduce public goods and overproduce private goods. If we want more public goods, we need a nonmarket force-government intervention-to get them. The government will have to force people to pay taxes, then use the tax revenues to pay for the production of national defense, flood control, snow removal, and other public goods.