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CA Foundation · Business Economics · Public Finance

A state government sets up a free public street lighting system because private firms cannot easily charge each user for it. Which of the following correctly identifies the Musgravian function and its rationale?

It is the allocation function, used to correct market failure. Street lighting is a public good whose benefits cannot be limited to payers, so private firms would under-supply it. The government therefore provides it and finances it through taxation, which allocates resources more efficiently.

  1. ADistribution function, to transfer income to the poor
  2. BStabilisation function, to reduce unemployment
  3. CAllocation function, to correct market failure in providing public goodsCorrect
  4. DDistribution function, to tax the rich more heavily

Explanation

Street lighting is non-excludable, so private markets under-provide it because of free riding. Providing it publicly corrects this market failure in resource allocation, which is the allocation function. The distribution and stabilisation options describe different aims.

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