Question

Show why competitive markets fail to provide socially efficient levels of public goods; explain how the government can mitigate these inefficiencies

Short answer

The quantities sold were at a higher price which is not equivalent to the marginal benefit of the consumer, thus failing to provide socially efficient allocation.

The government can mitigate inefficiencies through legislation, directly controlling the supply of goods, taxation, subsidies, and advertisement.

Step-by-step solution

Explaining why competitive markets fail to provide socially efficient levels of public goods

Market failure occurs when the price mechanism fails to account for all the costs and benefits necessary to provide & consumer goods. The market will fail by not supplying the socially optimal amount of the goods. Before the market failure, the supply and demand within the market do not produce quantities of the goods where the prices reflect the marginal benefit of consumption. This imbalance causes allocative inefficiency, and the structure of the market system contributes to market failure. The market can't be perfect in the real world due to inefficient producers, externalities, environmental concerns, and lack of public goods.

Explaining how the government can mitigate these inefficiencies 

During market failures, the government can mitigate the inefficiencies in the following ways:

• Legislation: Enacting specific laws, for example, banning smoking in restaurants helps in this process.
• Direct control:Directly controlling the supply of goods that have positive externalities. For example, education.
• Taxation:The government can impose taxes on those goods that are socially harmful, like cigarettes and alcohol, to discourage their consumption.
• Subsidies:The government can reduce the price of certain goods by providing subsidies.
• Advertisement: The government can encourage or discourage the consumption of certain goods through advertisement.