Public goods are those goods which are non excludable and non rival in nature
Question:True or False:(a) In a competitive market, the incidence of an excise tax ("who really pays the tax") is on consumers, if demand is perfectly inelastic.(b) An art museum is a good example of a public good that is best provided through government support.(c) Public goods are a market failure because the cost of providing them cannot be measured - that is, the failure is on the producer-side of the potential market for public goods.Public Goods:Public goods are those goods which are non excludable and non rival in nature. By non excludable we means that one cannot be excluded from consuming the product on the basis of whether one has paid for it or not and non rival means, the consumption of the good by one individual does not reduces its availability for others to consume.
Answer and Explanation:a. The statement is FalseReason: The burden of taxes (incidence of tax) can be borne either by consumers, or by sellers or by both in certain proportions. The incidence of tax depends on the elasticity of demand and supply of the good. If the elasticity of demand is greater than the elasticity of supply, the consumers will bear higher proportion of the taxes, on the other hand if the elasticity of demand is lesser than the elasticity of supply, a higher proportion of the taxes will be borne by the sellers. In the above the demand is perfectly inelastic. This means that the entire burden of tax will fall on sellers of the good and not the consumers.b. The statement is TrueReason: Public art museums are can be a good example of public good which is provided by the government. This allows the visitors to visit the museum free of cost, making it non excludable in nature. Also, visit to the museum made by one visitor does not reduce its availability for other visitors to consume. Thus the art museums (public museums) exhibit the characteristics of public good.c. The statement is FalseReason: Public goods are non excludable and non rival in nature. This results in free rider problem in public goods. Since public goods results in positive externalities in the market, often the costs of producing these goods exceed the benefits that people accrues from them. These goods being non excludable in nature, people often tend to consume it at free of cost (i.e the marginal cost of coming the good is zero). This is the reason why public goods result in market failure.
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