Discuss why the market has failed to allocate public goods efficiently. Also, critically discuss whether the market mechanism is more appropriate for allocating common goods?

Discuss why the market has failed to allocate public goods efficiently. Also, critically discuss whether the market mechanism is more appropriate for allocating common goods?

Market failure and public goods

Market failure refers to an economic situation where the distribution of goods and services in the free market is ineffective. Individual decisions will not help the group or as an economy at the level at which goods are to be produced and distributed. Public goods are the best example of identifying market failures in an economy. Public goods have some characteristics 

The commons include air and water, which are competitors and cannot be excluded in consumption. The unity of good one consumes cannot be consumed by others. In addition, it requires non-exclusion, which indicates the fact that no person should be excluded from consuming common commodities. The commons market has a foreclosure problem, so the good feature is different. Markets find it ineffective to consider non-exclusion characteristics. It can cost more than the optimum level which causes consumers not to consume common merchandise. Therefore, the market mechanism does not efficiently allocate common goods which can include all consumers in the consumption of common goods and needs that may not be satisfied by private markets. 

Non-exclusion of consumption refers to the ability of everyone to consume public goods even without paying for them. Opportunistic problems occur when private markets fail because they cannot estimate the utility or demand for consuming private goods and make a profit by producing or selling them. Noncompetitive consumption makes the process of deriving demand difficult as it is not easy to find who benefits from consumption and who does not. Streetlight is an example of the common good. The inability to appreciate the demand and utility of goods renders the public good ineffective in the market and leads to failure. The government determines the level at which goods must be produced and distributed to compensate for the welfare of the people from consuming public goods.

When a market fails to allocate resources efficiently, there is said to be market failure. Market failure may occur because of imperfect knowledge, differentiated goods, concentrated market power (e.g., monopoly or oligopoly ), or externalizes and Under allocation efficiency, all goods, services, and capital is allocated and distributed to its very best use. By definition, efficiency means that capital is put to its optimal use and that there is no other distribution of capital that exists which would produce better outcomes.In a market, resources are allocated based on the demand/supply in which prices plays an signalling function as it allocates resources to the production of different types of goods. It also acts as signalling mechanism between buyers and sellers; telling them how much and what to produce. What and how much to produce. Allocation efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.