Free Essay: Public Goods and Pareto Efficiency
Stiglitz (2000) defines Pareto efficiency as an economic situation that exists where when attempts to reallocate the available resources among economic players are made a player is inevitably made better than the other. Thus, no reallocation can occur without making one person better off while making the other worse off. In economics, this is a central concept in the attempts to realize efficiency in economics since when it exist it indicates an economy that is performing well in terms of resource allocation and income distribution.
As such, Pareto efficiency in allocation is the allocation in which no person becomes better off or worse off. Exchange efficiency refers to an economic situation that exists where trades that are mutually profitable are improbable. The trades exhibit exchange efficiency where the market is perfectly competitive since to a larger extent, there is impartiality that is flanked by marginal cost and price.
Exchange efficiency usually does not involve fairness or equality. However, its principle is based on the notion that one unit of a good that is more valuable is exchangeable with two or even more of a good that is less valuable without disadvantaging the other individual.
Qn. 2 (a)
Public goods refer to the goods that every citizen in a country can access. The benefits of enjoying such goods are not restricted to individuals in a country. An example of a public good is weather since it has inherent characteristics. These characteristics are non-rivalry and non-excludability. The implication of this is that it is not easy to deprive a person of its access. Consumption of this good by a single person cannot hinder synchronized consumption by the other individuals. The reiteration of Stiglitz (2000) is that goods are considered public if they are non-excludable commodities.
This means that a single person cannot hinder another from enjoying the good because they have not paid for the same. Every person is at liberty to access the good and even to enjoy it regardless of whether they have paid to enjoy it or not.
Additionally, weather is considered a public good since it cannot be divided. It is impossible to divide weather into simple units to enhance its accessibility to different people. Nevertheless, weather is available as a complete unit which all individuals can access with ease regardless of their location.
It would also be impossible to exclude certain people from accessing weather or enjoying it because such an exercise would be extremely costly. As such, the enormous expense and difficulty of limiting some people from accessing weather indicates that weather is clearly a public good enjoyed by all people.
Optimal reports’ number offered = 5
Weather’s social surplus reports, CS:-
CS= ½*Qmkt (Pmax – Pmkt)
Q-mkt = 5
P-max = 6.5
P-mkt = 4
½*5(6.5-4) = 6.25
Providing the optimal forecasts/reports number every week in competitive markets is impossible due to the fact that there is a free-rider problem. This problem occurs when some people strive for more enjoyment than a fair share. Consequently, this causes efficient allocation issue making it hard to provide the optimal reports’ number every week. Unfair competition also emerges which eventually affects efficiency in allocating weekly reports. Optimality can only be achieved in providing optimal reports where there are few or single plants for weather forecast that do not offer the service competitively but instead, they endeavor to offer sufficient weather forecasts for or to the people.
(d) How the Government Can Finance Weather Forecasts
Weather forecasts/reports can be financed by the government through the establishment of weather agencies in the country to enhance their operations via effective allocations. A public agency can be established by the government to serve the purpose of offering public warnings and forecasts among other vital products of weather that would always update the public. For example, adequate funds can be dedicated by the government for National Weather Service (NWS) operations. This would ensure that forecasts are made every week. With funding, the agencies would be able to provide forecasts on weekly basis and this would benefit the public.
Stiglitz (2000) makes economic propositions that, government financing can reduce social surplus because weather products’ price will decline. It is notable that weather reports that are already prepared will be readily accessible to the public at low prices than when the private agencies are responsible for producing the reports. In addition, there will be a significant reduction in social surplus because the public will be able to access the reports of an agency that is sponsored by the government. Thus, there will be an overall decrease in prices which will lower social surplus.
Stiglitz, J. (2000). Economics of the Public Sector. New York: Norton & Company.