ÁREA DE ABASTECIMIENTO Y VENTAS Hallazgo Nro

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Here the scenario is that the individuals‘ pursuit of pure self-interest leads to results that are not efficient or that can be improved upon from the societal point-of-view. In other words, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. The outcome is not Pareto optimal or Pareto efficient.

This phenomenon, market failure, exists when the system fails to function properly and the following conditions exist:

1. Non-Competitive Markets — This is when adequate competition does not exist. In an age where mergers are all too common, the result has been an increase in larger and fewer firms in many industries. In extreme cases, this results in a monopoly. The greatest threat that a monopoly poses is that it denies consumers the benefit of choice and competition. Because a monopoly occupies the top spot in its market, it can use its position to impede competition and restrict production. Thus in the end there are artificial shortages and higher prices.

2. Information Asymmetries - Buyers and sellers are not well informed. In order to efficiently allocate resources, consumers, business people, and government officials must have adequate information about market conditions. Without information uneducated decisions are made. This leads to mistakes and thus, market failure.

3. Resource Immobility — When resources are not free to move from one industry to

152 3.3 The Free Rider Situation

Free riding refers to a problem where under production of goods or services provided by the public sector lead to Pareto inefficiency or where there is an excessive use of the social goods. It is relevant in the case where non-excludability and non-rivalry in consumption of social good by the consumer will establish the consumption of the goods without contributing towards its production. This leads to underproduction of social goods and gives rise to free riding. Potential users may wait for the good to be supplied and then consume the good for free. For example National Housing Scheme (NHS) is rivalry in consumption and excludable as non-payers can take a free ride and enjoy the benefits of consumption (free riders). This creates market failure as smaller amount of money is being regenerated into the health service. Thus there is less money for the government to invest into the health services. This results in hospitals having out dated equipment, decrease in hospital beds and cuts in hospital jobs.

To solve the problems of such free riders we can look at following three issues as identified by McMillian: The first issue is that consumer may not be willing to pay for the good such as NHS.

For example to solve this issue government can collect taxes for the provision of social goods and the problem might disappear by further restricting the deals with free rider problem . The second issue; what is the optimal level of production that requires information on individual demand for social good. People can give false information about their taste as consumer might be hoping to bring about a non-Pareto optimal equilibrium that gives them higher utility. That is caused by lack of information as observed by Samuleson. It causes particular problems in the case of Non-rival good consumption aspect of social goods that leads to "Demand Revelation"

problems, as consumer might not reveal their true marginal rate of substitution. Each person's marginal rate of substitution is different which is required to establish welfare maximization.

This can lead to excessive supply of funds and inefficiently allocation of the goods as most social goods and services are financed through a process of taxation, having no choice. Optimal levels of expenditures are difficult to be established. In a nutshell, the provision of social goods can easily be over-financed or under-financed.

The demand revelation problem in the absence of perfect information can be solved by relaying on potential competition in the market in a way to minimise adverse impact of collusion or

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coalition. Tideman and Tullock (1976) pointed out that Demand revelation is a superior for making choices. Principle person is given a choice of accepting a decision made without his participation or changing to whatever he wants by paying for it and having it done otherwise"

Furthermore government could simply make an estimate of the optimum output distribution of tax and permit them to do better. The "advantage of this approach is that it would provide the market with information that is otherwise not available to government." They can also use mechanism that has been designed to induce true preferences revelation under specific condition to attain efficient provision of public goods.

The third issue of free riding concern is as to what happens if the number of people grows larger in the economy. The issue can lead to under provision of services and goods. For example, problems like congestion costs arise, due to increase in number of users thus reducing the benefits to each individual. For example, the NHS, where the demand for healthcare is greater than supply; and in the absence of the price mechanism, demand is rationed through waiting lists.

That waiting list reduces the benefits of individuals due to overcrowding as fewer resources like beds or doctors are available.

The Coasian solution could also be used to solve free rider problem, where theorem, suggests the idea that a legal system would be unnecessary for the regulation of externalities in a world without transaction. It is where beneficiaries come to an agreement that satisfies both parties, thus reaching a Pareto effect allocation of resources. For example a farmer's cattle are consuming the protective plants at the edge of another farmer field, which reduces his output. This is not necessary for the government to step in and force parties to act properly. It is in their own interest to come to an agreement, as costs of implementation could be higher for both parties.

Therefore, they will be able to find an agreement that is Pareto efficient. Since long transaction costs will be too high. In Nigeria, farmers and herdsmen have not been able to come to such as agreement, hence the prevailing clashes in recent times.

Societies have dealt with government provision of social goods and services in different ways.

That could include where a representative could be elected and represent people preferences.

Voting is a common way to decide the allocation of problems. Whether people vote on public

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issues or elected representatives decide the social goods and their provision. Under majority voting, maximum spending will be based on median voter that might not be an efficient level.

The main issue of public good is that an individual is paying for someone else's consumption and sometime people don't pay enough.

4.0 CONCLUSION

Social good is that good which once produced, can be consumed by an additional consumer at no additional cost while the consumers cannot be excluded from consuming the social good once it is produced. Examples of social goods include free-to-air television, fresh air, knowledge, national security, flood control systems and street lighting. Social goods possess three major characteristics, which are inclusiveness, zero increment or marginal costs, and spill-over effects.

They are produced by the government because a market failure has occurred. Market failure, exists when the system fails to function properly and the following conditions exist: non-competitive markets, information asymmetries, resource immobility, and prices do not reasonably reflect the costs of production. Societies have dealt with government provision of social goods and services in different ways. That could include where a representative could be elected and represent people preferences.

5.0 SUMMARY

In this unit, you have learnt about: the characteristics of social goods, the social good and market failure, and the free rider situation.

6.0 TUTOR - MARKED ASSIGNMENT

1. Explain the concepts of social good and market failure 2. What are the conditions responsible for market failure?

3. What do you understand by free rider situation?

155 7.0 REFERENCES/FURTHER READINGS

Musgrave, R.A. & Musgrave, P.B. (1989). Public finance in theory and practice. New Delhi, Tata McGraw-Hill.

Nwinee, B.F., & Torbira, L.L.(2012). Public financial management in Nigeria. Port Harcourt.

University of Port Harcourt Press.

Okoh, S.E.N. (2008). Public sector economics: Principles and policies. Benin City, Mindex Publishing.

Oriakhi, D.E. (2002). Introduction to public finance. Benin City, Mindex Publishing.

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UNIT 2 THE CREATION OF SOCIAL NETWORKS