A-Level Economics Model Essay: Street Lighting, Public Goods & Externalities (2022 H2 Econs Past Paper)

Street lighting is considered to be a public good. However, there are also negative externalities resulting from the generation of electricity for the lighting on the environment and the effect of bright street lights on wildlife.

(a) Explain two different reasons for the market failure associated with the provision of street lighting. [10]

b) Discuss the extent to which a government should intervene in the market to ensure that the benefits of street lighting can be obtained while minimising the negative impacts. [15]

Part (a): Reasons for Market Failure (10 Marks)

[Point] Market failure occurs when the free market fails to allocate resources efficiently, resulting in a loss of social welfare. In the case of street lighting, market failure arises from two distinct sources: its fundamental nature as a public good (causing a missing market), and the negative externalities generated by its production and use (causing over-allocation).

[Explanation – Public Good] The primary reason for market failure is that public street lighting is a public good, characterized by being non-excludable, non-rivalrous, and non-rejectable in consumption. Street lighting is non-excludable because once provided, it is impossible to prevent anyone in the vicinity from benefiting from it. It is non-rivalrous because one person’s consumption does not reduce the quantity and quality available to others. Finally, it is non-rejectable, as anyone walking by will inevitably “receive” the luminance and cannot practically refuse it.

[Link] The non-excludability of street lights creates a severe free-ridership problem. Rational consumers will conceal their true demand and choose not to pay, knowing they can simply consume the good for free once someone else provides it. Because private firms cannot exclude non-payers, they cannot charge a price or earn revenue. This results in a “missing market,” where the free market provides zero public street lighting, leading to a massive deadweight welfare loss as the net benefits to society are completely foregone – a complete market failure.

[Explanation – Negative Externalities] The second reason for market failure relates to the negative externalities—costs imposed on third parties not involved in the transaction (ie neither consumer nor producer of the good or activity.) While the free market fails to provide public street lighting, private entities (like commercial businesses or private gated communities) may install their own exterior lighting and governments may also install such lighting. Such provision generates negative externalities. As the preamble highlights, generating electricity for this lighting releases carbon emissions. Furthermore, the bright lights cause light pollution that disrupts wildlife ecosystems and migratory patterns, which can eventually threaten food security and the living standards of future generations.

[Link] A private producer deciding how much lighting to install only considers their Marginal Private Cost (MPC) and Marginal Private Benefit (MPB), producing at the private equilibrium (Qp) to maximise it profits or private welfare. They ignore the Marginal External Costs (MEC) of pollution and ecological damage. Therefore, the Marginal Social Cost (MSC = MPC + MEC) is higher than the MPC. Because Qp is greater than the socially optimal level of provision (Qs, where MSC = MSB), the free market over-allocates resources to private exterior lighting. As shown in diagram, the total costs to society for Qp-Qs units (QsabQp) is greater than the total benefits to society for (QsacQp) by abc, which is the deadweight welfare loss to Society. Hence, societal wefare is not maximised and market failure occurs.

[Insert Diagram: Negative Externalities in Production showing MSC above MPC, with output Qp > Qs, and the resulting deadweight welfare loss area]

Part (b): Government Intervention in Street Lighting (15 Marks)

[Point] To determine whether to intervene and to what extent, a government must weigh the massive social benefits of street lighting against its social costs, including budget constraints, environmental damage, and unintended consequences.

[Explanation – Direct Provision] Because street lighting is a public good plagued by the free-rider problem, the free market will not provide it. Given the immense social benefits—such as reduced crime rates, increased road safety, and higher nighttime economic productivity—governments are highly justified in intervening to a large extent through direct provision. The government finances the lighting through taxation and bypasses the free-rider problem by providing it at a zero price to consumers.

[Evaluation – Cost-Benefit Analysis] However, government intervention is not always warranted simply because a good is public. The government must conduct a rigorous marginal Cost-Benefit Analysis (CBA) to minimize negative impacts. They must consider explicit costs (electricity generation) and opportunity costs (what the tax funds could have been used for instead, such as building hospitals). In dense city centers where nighttime activity is high and wildlife is scarce, the social benefits vastly outweigh the costs. Conversely, in remote rural areas, the environmental damage to wildlife and financial costs may heavily outweigh the benefits, meaning street lighting should not be provided, or strictly limited. This is because as the Government’s objective is to maximise societal welfare, it must hence also take into account of the possible negative externalities generated as explained in part a).

[Evaluation – Government Failure] Furthermore, a high degree of intervention carries the risk of government failure. Direct provision can lead to productive inefficiency because the government lacks a profit motive and cost-consciousness, placing an unnecessarily high burden on taxpayers. To minimize negative externalities, the government must actively mitigate the impacts of its own provision. This requires further spending, such as investing in less pollutive motion-sensor LED lights or planting greenery to shield local wildlife from light pollution.

[Evaluation – Imperfect Information] Even well-intentioned governments can make mistakes due to imperfect information. Because street lighting is a public good, residents will conceal their true valuation, making it hard to gauge actual demand. Additionally, it is incredibly difficult to accurately assess the exact monetary value of external costs, like wildlife disruption. If the government miscalculates these factors in areas with low nighttime traffic, the street lights could be redundant, leading to an over-provision that worsens environmental impacts without proportional benefits.

[Concluding Section / Synthesis] In conclusion, the government should intervene to a large extent to directly finance street lighting, as the safety and economic benefits especially in urban areas are too massive to be abandoned to a missing market. However, to minimize the negative impacts of government failure and environmental degradation, the government should utilize “Competitive Tendering.” By contracting out the actual building and maintenance of the lights to private firms—with strict environmental and energy-efficiency standards built into the contracts—the government ensures the public good is provided while harnessing the cost-efficiency, innovation, and technological expertise of the private sector.

💡 Chief Tutor’s Tip: This essay is a perfect example of how to secure your E3 evaluation marks. Instead of just listing “pros and cons,” the recommendation of “Competitive Tendering” acts as the ultimate E3 synthesis, solving the problem of government inefficiency while ensuring the public good is delivered.

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