International Trade - Theory and Policy, 2010a

The other classic example of a public good is national security or national defense. The armed services
provide security benefits to everyone who lives within the borders of a country. Also, once provided, it is
difficult to exclude nonpayers.
Information has public good characteristics as well. Indeed, this is one reason for the slow start of
electronic information services on the World Wide Web. Once information is placed on a Web site, it can
be accessed and used by millions of consumers almost simultaneously. Thus it is nonrival. Also, it can be
difficult, although not impossible, to exclude nonpaying customers from accessing the services.
Nonclearing Markets
A standard assumption in general equilibrium models is that markets always clear—that is, supply equals
demand at the equilibrium. In actuality, however, markets do not always clear. When markets do not
clear, for whatever reason, the market is distorted.
The most obvious case of a nonclearing market occurs when there is unemployment in the labor market.
Unemployment could arise if there is price stickiness in the downward direction, as when firms are
reluctant to lower their wages in the face of restricted demand. Alternatively, unemployment may arise
because of costly adjustment when some industries expand while others contract. As described in the
immobile factor model, many factors would not immediately find alternative employment after being laid
off from a contracting industry. In the interim, the factors must search for alternative opportunities, may
need to relocate to another geographical location, or may need to be retrained. During this phase, the
factors remain unemployed.
Imperfect Information
One key assumption often made in perfectly competitive models is that agents have perfect information. If
some of the participants in the economy do not have full and complete information in order to make
decisions, then the market is distorted.
For example, suppose entrepreneurs did not know that firms in an industry were making positive
economic profits. Without this information, new firms would not open to force economic profit to zero in
the industry. As such, imperfect information can create a distortion in the market.
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