Economics 9708/11 — October/November 2015

Background Concept

A pure market economy (or free market economy) allocates resources entirely through the price mechanism. Decisions about what, how, and for whom to produce are made by consumers and producers pursuing their own self-interest. Private property rights are protected, and the profit motive drives production. Goods and services are provided by private firms.

A mixed economy combines elements of the market mechanism with government intervention. The government provides goods and services that the market fails to provide efficiently or equitably, corrects market failures, and redistributes income.

Public goods are a specific type of market failure. They have two key characteristics:

1. Non-rivalry: Consumption by one person does not reduce the amount available for others. (e.g., a streetlight: one person walking under it does not reduce the light for another).
2. Non-excludability: It is impossible or prohibitively costly to prevent anyone from consuming the good. (e.g., you cannot stop a passer-by from benefiting from a streetlight).

Because of non-excludability, a free-rider problem arises. People can benefit from the good without paying for it. Private firms cannot charge a price for the good, so they have no profit incentive to provide it. This is why public goods are typically provided by the government in a mixed economy, funded through taxation.

Understanding the Question

The question asks you to identify a feature of travelling by road that would exist in a mixed economy but would not exist in a pure market economy. The key phrase is "but not in a pure market economy". This means the feature must be something that a pure market economy cannot provide on its own. You must find the option that represents a public good or a good that suffers from such severe market failure that government provision is necessary.

Approach

1. Define the two economic systems to establish the criteria for provision.
2. Define a public good and the free-rider problem.
3. Test each option against the characteristics of a public good.
   • Is it rivalrous?
   • Is it excludable?
   • Can a private firm profitably provide it?
4. Select the option that fails the market test and requires government provision.

Step-by-Step Reasoning

1. Option A: Bus services. Bus services are rivalrous (a seat taken is a seat taken) and excludable (you must pay a fare to board). They are a private (or merit) good. Private bus companies can and do operate profitably in pure market economies. Therefore, bus services can exist in a pure market economy.

2. Option B: Petrol (gas) stations. Petrol is a private good. It is rivalrous (the petrol I put in my tank cannot be used by you) and excludable (you must pay for it). Petrol stations are a standard feature of a pure market economy.

3. Option C: Streetlights. Streetlights are the classic textbook example of a public good.

   • Non-rivalrous: My use of a streetlight does not diminish its availability for you.
   • Non-excludable: It is impossible to prevent a pedestrian or driver from benefiting from a streetlight without incurring massive costs.
   • Free-rider problem: Because people cannot be excluded, they will not voluntarily pay. A private firm cannot charge a price and make a profit. Therefore, a pure market economy would not provide streetlights. A mixed economy provides them through government spending (funded by taxes).

4. Option D: Toll bridges. A toll bridge is excludable (a toll booth can prevent access without payment). It is also rivalrous (congestion can occur). It is a private good (or a club good). Private companies can build and operate toll bridges for profit. Therefore, toll bridges can exist in a pure market economy.

Conclusion: Streetlights are the only option that is a public good and requires government provision. The correct answer is C.

Key Takeaways

• The fundamental difference between a pure market economy and a mixed economy lies in the role of the state in correcting market failures.
• The most important market failure justifying government provision is the existence of public goods.
• To identify a public good, always check for non-rivalry and non-excludability. The free-rider problem is the direct consequence of non-excludability.
• This question tests the ability to apply theoretical concepts (economic systems, public goods) to a real-world example.

Common Mistakes

• Confusing "publicly provided" with "public good": Many students think bus services are public goods because they are often provided by the state. However, bus services are rivalrous and excludable (merit goods). The state provides them for social reasons (equity, external benefits), not because the market fails entirely.
• Thinking toll bridges are public goods: A toll bridge is excludable. The existence of a toll means the market can provide it. The question asks for something a pure market economy cannot provide.
• Forgetting the free-rider problem: Simply stating streetlights are a public good is not enough. The reasoning must explain why the market fails (the free-rider problem makes private provision unprofitable).
• Misreading the question: A student might choose an option that is commonly provided by the state, rather than one that must be provided by the state because the market fails.

Things to Be Careful About

• Read the exact wording: "would be seen in a mixed economy but not in a pure market economy". This is a strict exclusion criterion.
• Distinguish between market failure and government intervention: The question is specifically about the inability of the market to provide the good, not just a preference for state provision.
• Use precise economic terminology: "Non-rivalrous", "non-excludable", "free-rider problem", "public good", "price mechanism". These terms are what the mark scheme rewards.
• Consider the counter-argument: For each option, ask yourself, "Could a private firm make a profit providing this in a completely free market?" If yes, it can exist in a pure market economy.