Skip to content

IAI Actuarial Core Principles · Business Economics · Government intervention in a market

Street lighting in a town is non-excludable and non-rivalrous. Why does a private market typically under-provide it?

Street lighting is a public good: nobody can be excluded and one person's use does not reduce another's. Individuals free-ride rather than pay, so private firms cannot recover costs and the market under-provides, which is why the government supplies it through taxation.

  1. AConsumers can free-ride, so firms cannot collect enough revenue to cover costsCorrect
  2. BDemand for street lighting is perfectly price elastic
  3. CProducers face rising marginal costs of production
  4. DConsumers have imperfect knowledge of the quality of lighting
  5. Lighting generates only private benefits to the buyer

Explanation

Non-excludability means people benefit without paying, creating the free-rider problem. Private firms cannot earn enough revenue, so provision is below the socially desirable level. Governments therefore provide such goods funded by taxation. Option E contradicts the non-excludable, non-rivalrous nature.

Did you get it right without looking?

One question tells you little. A timed set on Government intervention in a market shows your real accuracy, how long you take and where you lose marks.

Practise Government intervention in a marketFree diagnostic mock

More Government intervention in a market questions