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Homework answers / question archive / An example of a public good is a fireworks display
An example of a public good is a fireworks display. Nobody can be excluded from enjoying them, and this leads to a "free-rider" problem. But there are also an "economies of scale" aspect of it: watching grand fireworks gives much more pleasure than just a few sparkles in a backyard - which leads to the fact that the best fireworks display are those produced by the government (maybe?).
a. What do you say to the idea of a city government imposing a tax on those who watch the fireworks? Give two reasons to support it, and two reasons not to support it.
b. Aside from the case of the fireworks, give other specific events or issues that can be categorized as market failure. Explain the nature of the market failure.
a)
Considering the economies of scale aspect of watching fireworks, it creates the market inefficiency. Hence the government can impose the tax on those watching fireworks to reduce the market inefficiency. On the other hand, the government gains the tax revenue from the economies of scale created.
If not to support taxation, it can be said that enjoying and watching fireworks is the public good, everyone should not be taxed. Those watching freely and not able to pay should not pay the tax while those who are able to, can pay. Another argument would be social welfare benefits. If the show is treated as the for public entertainment, the government can offer it as completely free, as there is no profit motive behind government actions. Just as the government provides many other services free for social welfare.
b)
Some other events which cause market failures are:
Pollution due to factory: Any firm in the market for example a chemical factory, coal using factory, does create pollution and harm to the environment by leaving affluent untreated in air or water, thermal pollution, overuse of resources. This causes harm to the people residing near the factory or other ecosystem factors. Here additional costs created by a firm are causing the diseconomies of scale and thus a market failure.
Free higher education: IF the higher education is made free for all, it is beneficial for those who cannot afford it, but also create the free-rider problem. Those who can afford it, but not paying are getting an extra free benefit. Thus there is no equitable distribution of positive cost created by free education.
Natural monopolies: these monopolies face zero marginal cost, due to free raw material or resource availability and able to beat the other firms in the market in terms of cost. After becoming a monopoly, they can earn very high profits by charging any price. Consumer surplus decreases substantially in this case. Hence the external cost to society is higher.
