Direct State Provision

Question 1

Diagram analysis

Answer 1

• The government may decide to provide a merit good by direct state provision and supply all of the resources in the market.
• Perfectly inelastic supply curve
• Demand curve slopes downwards
• market is provided free at the point of consumption
• Supply fixed at Q1 = consumers receive free.
• consumers past Q1 excluded
• aims to solve problem of overconsumption/ overproducton
• more socially efficient
• reduce welfare loss

Question 2

advantages of direct state provision

Answer 2

• no price exclusion
• government attempts to consider what society desires
• resource allocation improves

Question 3

Disadvantages of direct state provision

Answer 3

• goods provided free at point of use pressure on govt.
• How should excess demand be rationed
• direct provision is expensive
• intervention could exacerbate the market failure
• state-run organisations be wasteful (no invisible hand)
• private sector is completely ignored
• what is socially optimal level?