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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

A street lighting system in a town is available to everyone, and one person's use does not reduce its availability to others. Private firms are unwilling to supply it because they cannot charge individual users. Which feature of the good best explains why the market fails to provide it?

The key feature is non-excludability. Because nobody can be prevented from benefiting from street lighting, people can free ride without paying, so private firms cannot recover their costs and the market under-provides it, leaving the state to supply it.

  1. AIt is subject to economies of scale
  2. BIt is non-excludable, allowing free ridingCorrect
  3. CIt generates high consumer surplus
  4. DIt is a demerit good

Explanation

Public goods are non-excludable and non-rivalrous. Because people cannot be prevented from using the lighting, they can free ride and not pay, so private firms cannot earn revenue and do not supply it. Demerit goods are over-consumed harmful goods, which does not apply.

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