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Market Failure — Public Goods · Paper 2 — Free Economics HL Practice Questions
1MasteryLAQCharacteristics of public goods14 marksPaper 2~21 min
A coastal country, Country Z, faces recurring storm surges. The government is considering two options for flood protection:
- Option A: Construct a network of sea walls at a cost of USD 200 million. Once built, no resident within the protected area can be excluded from the reduced flood risk, and one resident's protection does not reduce the protection available to any other resident.
- Option B: Offer subsidised flood insurance to individual households. Households must apply and pay a reduced premium; those who do not apply receive no coverage.
(a)
Explain why the sea walls in Option A have the characteristics of a public good, with reference to non-excludability and non-rivalrous consumption. [4 marks]
(b)
Using a clearly labelled , explain why the free market would fail to provide the socially optimal quantity of sea walls, referring to the free-rider problem. [4 marks]
(c)
Evaluate whether the government of Country Z should directly provide sea walls (Option A) rather than rely on subsidised private insurance (Option B) to protect residents from flood risk. [6 marks]
Solutions
2MasteryLAQCharacteristics of public goods10 marksPaper 2~15 min
Coastal City A is a popular tourist destination with a historic lighthouse that has operated for over 150 years. The lighthouse beam warns ships of dangerous rocks and is visible to all vessels within a radius. The city council has proposed charging USD 15 person to climb the lighthouse as a tourist attraction. Local shipping companies argue that the lighthouse's navigational function is a public good and must remain freely available. The council states that without tourism revenue it cannot meet the USD 200,000 annual maintenance cost.
(a)
State the two key characteristics of a public good. [2 marks]
(b)
Explain why the lighthouse, as a navigational aid, is non-excludable and non-rivalrous in consumption. [4 marks]
(c)
Evaluate whether government provision funded by general taxation is the most appropriate solution to the free rider problem arising from the lighthouse's navigational function. [4 marks]
Solutions
3MasteryLAQCharacteristics of public goods11 marksPaper 2~17 min
Data
Country X has a coastline threatened by rising sea levels. The government is considering building a series of sea walls to protect all coastal properties. Once built, the sea walls cannot prevent any resident from benefiting from the reduced flood risk, and one resident's enjoyment of that protection does not reduce the protection available to others. The total cost of the project is USD 500 million. Private construction firms estimate they could build smaller, individual sea walls for the wealthiest of coastal residents at a cost of USD 80 million, but they would not build walls for the remaining .
(a)
Define the term "non-excludable" and explain how the sea wall project demonstrates this characteristic. [2 marks]
(b)
Using the data, explain why private construction firms would not voluntarily provide sea walls for all coastal residents. [3 marks]
(c)
Explain why the sea wall project is an example of a public good. [2 marks]
(d)
Evaluate whether direct government provision or a subsidy to private firms is a more effective policy to ensure all coastal residents are protected from flood risk. [4 marks]
Solutions
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