What this lesson teaches
I can explain how taxes, subsidies, quotas, tradeable permits, provision, rules and public education correct market failure.
Syllabus 9570, 2.3.3(b). Microeconomic Policies: Policy measures including taxes and subsidies, quotas and tradeable permits, joint and direct provision, rules and regulations, public education in achieving efficiency and equity
Make a guess
The government pays for 200 extra clinic appointments a month. Must it run the clinics itself?
- No. It can fund a private provider to deliver them.
- Yes. Government money must go to government clinics.
- Yes, because private firms cannot be trusted with public money.
Show the answer
No. It can fund a private provider to deliver them.
Funding and delivery are separate. A government can pay a private firm to provide a service.
The government can provide goods itself, or share provision with the private sector.
For public goods, the government usually provides them directly and funds them with taxes, since the market would not.
For merit goods, the government may provide them directly or share provision with private firms. In Singapore, public hospitals, polyclinics and private clinics all provide healthcare.
Government funding does not mean the government must do the work: it can pay a private contractor to deliver the service.
Direct provision uses tax money, which has an opportunity cost. It can also be hard to judge how much to provide, and without competition, providers may be less efficient.
- Public goods
- Provided by government, funded by taxes.
- Merit goods
- Often joint public and private provision.
Worked example: More clinic places
A government funds 200 extra clinic appointments, delivered by a private contractor. Private clinics continue to operate. Trained staff are scarce.
- Public funding, private delivery: a form of joint provision.
- More appointments may help people who could not afford private clinics.
- But if the contractor hires staff away from other clinics, total capacity may barely rise.
- Success depends on adding real capacity, not just moving staff around.
Watch out for this
If the government pays for a service, it must also run it.
Funding and delivery can be separate. The government can fund a service delivered by private providers.
Check your understanding
Why does the government directly provide national defence?
- It is a public good, so the market would not provide it.
- Defence has negative externalities, so the market would make too much.
- Private firms would charge too much for it.
Show the answer
It is a public good, so the market would not provide it.
Right. Free riding means no private firm could collect enough revenue.