State Provision | A-Level Economics Model Paragraph
State provision
State provision occurs when the government chooses to provide goods and services free of charge, to correct a market failure. For example, dental care is a service that has positive externalities in consumption. If left to the free market, it would be under-consumed, because people would ignore the fact that people who get regular checkups and have healthier teeth provide a benefit to third parties, such as being less likely to be absent from school or work due to teeth pain or health issues. If the government were to fully fund dental care and provide it free of charge via the NHS, this could help correct the under-consumption caused by this positive externality.
The diagram shows that the government may research the socially optimal quantity and provide that quantity of dental care free of charge, as shown by the quantity Q1. The benefit of this is the increase from the equilibrium quantity which would have been provided by the free market, meaning more people would have access to reliable dental care free of charge (P0), which should mean that the market failure has been resolved by the government.
However, there is a substantial opportunity cost associated with a full state provision of services like dental care. Opportunity cost is the value of the next best alternative. The government could spend the same money in other areas, to improve NHS healthcare or state education. If the government must restrict spending in these areas, this can defeat the purpose of spending more to provide dental care, as it could lead to other market failures instead.
However, there is a risk of government failure as state provision causes a market distortion. At the price P0, there is excess demand, as shown by the difference between Q1 and Q2. This is because there are more people who are willing and able to consume the service since it's free, compared to the volume that the government are willing and able to provide for free. This means that there will be large waiting times or backlogs of people wanting to visit the dentist. Overall, this could lead to rushed services or poor quality. We see this with other state-provided services, in the form of large class sizes at schools, or long wait times at A&E. If the government are unable to fund enough of the service, there will continue to be an under-provision and under-consumption and the market failure will still exist.
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