CA Foundation · Business Economics · Public Finance
Private firms in an unregulated market are unwilling to build a rural village road, because they cannot stop non-payers from using it and one person's use does not reduce another's. The government therefore builds and funds it from tax revenue. This intervention is mainly justified by which feature of the good?
The justification is non-excludability and non-rivalry. Because non-payers cannot be kept out and use by one does not reduce use by others, people free ride, and private firms cannot recover costs. The market therefore fails to provide the good, so the government provides it from taxes.
- ANon-excludability and non-rivalry, which lead to market failure through free ridingCorrect
- BIts demand is highly price elastic
- CIt is a demerit good that must be discouraged
- DIt is produced under conditions of perfect competition
Explanation
When people cannot be excluded and use is non-rival, individuals can free ride, so private firms cannot collect revenue and the market under-provides or fails to provide the good. Hence the state provides it through taxes. The road is not a demerit good, and perfect competition does not explain the failure.
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