Direct provision may not necessarily be free.

Introduction

Public goods will not be produced in the absence of government intervention. Public goods are goods that are non-excludable and non-rivalrous. A good is non-excludable when it is impossible or prohibitively costly to prevent non-payers from consuming the good once it has been produced. A good is non-rivalrous when the consumption of the good by a consumer will not reduce the amount available to other consumers. Examples of public goods include national defence and street lighting. As public goods are non-excludable, consumers can consume them without paying for them. Therefore, consumers will want to consume public goods without contributing to their production which is known as the free-rider problem. In other words, the non-excludability of public goods leads to the absence of effective demand. Since consumers have no incentive to pay for public goods, private firms which are profit-oriented have no incentive to produce them. Therefore, in the absence of government intervention, public goods will not be produced due to the non-excludability. Furthermore, as public goods are non-rivalrous, the marginal cost of provision, which is the additional cost resulting from providing a good to one more consumer, is zero. Therefore, for allocative efficiency to be achieved, the price should be zero, assuming no externalities. However, private firms are profit-oriented and hence will only produce a good at a positive price which corresponds to a quantity demanded lower than that at a zero price. Therefore, even if public goods were produced by private firms, assuming away the problem of non-excludability, they would be under-consumed in the absence of government intervention due to the non-rivalry.

Positive externalities, or external benefits, lead to a divergence between marginal social benefit and marginal private benefit resulting in under-consumption/production. Take healthcare for example. The private costs of healthcare are the costs of production incurred by the firms such as the costs of materials and labour. These costs are passed on to the consumers in the form of a positive price. Therefore, from the consumers’ perspective, the marginal private cost of healthcare is the price that they pay for the unit of the good. Assuming no negative externalities in healthcare consumption, the marginal social cost is equal to the marginal private cost. The private benefits of healthcare are the satisfaction derived by the consumers such as immunity to flu viruses when they get flu vaccination. The consumption of healthcare produces positive externalities. For example, it prevents the spreading of diseases to others. It also contributes to a healthier and hence more productive labour force which is beneficial to the wider community. These positive externalities lead to a divergence between the marginal social benefit and the marginal private benefit. As firms and consumers consider only private costs and benefits, the divergence between the marginal social benefit and the marginal private benefit of healthcare results in under-consumption.

Many students think that direct provision is free. This economic misconception will be discussed in greater detail in economics tuition.

Exposition

Direct provision occurs when the government engages in the provision of a good directly. For example, the Singapore government provides face masks directly in times of severe haze. Direct provision is a measure used to correct market failures caused by public goods such as national defence and street lighting. It is also commonly used to correct market failures caused by positive externalities and imperfect information about the beneficial effects such as education and healthcare. It is important to note that when the government provides a good directly, it does not necessarily produce the good. For example, the Singapore government does not produce the face masks it provides directly in times of severe haze. Many students think that when the government provides a good directly, it will charge a zero price. In other words, they think that direct provision is free. This is erroneous. Direct provision is not necessarily free. In the case of direct provision of face masks by the Singapore government in times of severe haze, the face masks are provided free. Such direct provision is called free direct provision. However, although direct provision is free in some cases, it is not so in all cases. In other words, direct provision may be chargeable, which I shall call chargeable direct provision. Chargeable direct provision occurs when the government engages in the provision of a good directly and charges a positive price. For example, the Singapore government provides healthcare directly and charges a positive price. Indeed, healthcare provided at public hospitals in Singapore which are commonly known as restructured hospitals is rather costly, despite government subsidy. Therefore, one should not equate direct provision with free direct provision. Rather, they should think of free direct provision as one of the two types of direct provision.

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