Lecture 4 Public Goods Provision
4.1 Outline of the lecture
While the original Solow model does not have a role for government, we saw in the previous lecture that the government can play a critical role in improving the way in which markets worked.
In any well-functioning market where firms and consumers trade with each other, price carries information about the how the goods are valued by different participants in the market. Participants who value the good more or less than the price of good have the incentive to find someone to trade with. Once all potential trades have taken places, it follows that all economic surplus has been exhausted and the Pareto efficiency has been in that market, i.e., no one can be made better-off without making someone worse-off. This was the initial insight of Adam Smith that that was later formalised by the Arrow and Debreu (1954).
In the instance of the Kerala Fish market before the rollout of mobile phone network, significant amount of fish was destroyed. At any given time, a number of markets did not clear and the price in various markets. The price of fish in these market did not reflect the value the market participants placed on the fish. It is particularly intriguing because the transport cost of accessing the market for fisherman is low in this case. The fishermen could decide which fish market along the coast they would like to go to. One would expect that with low transport cost, most of the market should clear and the price of fish in various markets along the coast would be fairly similar. The Jensen (2007) paper shows us that the various markets do not clear because they were either under or over supplied with fish. The low transport cost of getting the freshly caught fish to the various fish markets should have meant that the supply would dynamically respond to the market conditions. Yet, this does not happen and there were a number of markets that did not clear.
There are two reasons why the fish markets along the Kerala coast were not clearing.
The first one was that the refrigeration was expensive and the fisherman could not afford it. This implied that the quality of the fish deteriorated really fast and the fisherman had only one shot at selling the fish. The assumption in the Solow growth model is that consumer goods are a flow and do not deteriorate, i.e., they flow from the producers to the consumers. If they don’t find consumers in one market place, they flow to another till they find a consumer willing to buy it at the prevailing price.
The second reason was that the fishermen could not get information about the market conditions in various markets. In well-functioning markets, the price is a signal that carries information about the market conditions. cost of getting information about the prices in different markets was expensive. paper shows that the market did not clear because the good being sold in the market was not durable and the cost of acquiring information about the prevailing price in the markets was low.