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Economic Systems and Market Failure: Question 3

Syllabus 2.8, 2.9, 2.10

Multiple choice 1 mark

Four proposals for a small river-delta town are described below.

Which one is an example of a public good, as distinct from a merit good, a demerit good, or a good with an external cost?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall the two tests for a public good

A public good must be both:

  • Non-excludable. Once it is provided, no one can be stopped from benefiting, even if they did not pay.
  • Non-rival. One person benefiting from it does not reduce the amount available to anyone else.

Step 2: Test option A against these two properties

Once the flood-warning siren network is built, every resident of the town hears the warning. No one can be excluded, whether or not their household contributed to its cost. And one resident hearing the siren does not stop any other resident from hearing it too. Both properties hold, so this is a public good.

Step 3: Rule out the other options by checking what they actually describe

  • Option B (literacy classes) is a merit good: it is under-consumed relative to the wider benefit it creates for society (people who cannot read fully are less able to find employment or make informed decisions, effects that spread beyond the individual attendee). But the classes are excludable (a class has a limited number of seats, and a place taken by one attendee is a place not available to another) so it fails the non-rival test and is not a public good.
  • Option C (energy shots) is a demerit good: it is over-consumed relative to the health costs it creates for the consumer and, potentially, for the wider health system. It is bought privately, is excludable (only a purchaser gets a can) and is rival (one teenager buying a can reduces the stock available to others), so it is not a public good.
  • Option D (tannery waste) describes an external cost of production: a cost imposed on the downstream fish farms that is not reflected in the tannery’s own price. This is a spillover effect of making leather goods, not a good being consumed at all, so it cannot be classified as a public good, a merit good or a demerit good.

Step 4: Select the option that matches

Only option A is genuinely non-excludable and non-rival.

Final answer

The flood-warning siren network is the true public good, option A. The other three describe a merit good (B), a demerit good (C) and an external cost of production (D).