The correct option is 1 and 3 only.
Explanation
The "Allocation Function" of public finance refers to the government's role in allocating resources to provide goods and services that the market mechanism (private sector) fails to provide efficiently. Public goods are a specific category of goods characterized by non-rivalry and non-excludability.
Statement-wise Analysis
- Statement 1 is Correct. Public goods are non-excludable, meaning it is technically difficult or expensive to prevent individuals from using them (e.g., national defense, street lighting). This leads to the free-rider problem, where individuals can consume the good without paying for it, discouraging private sector production.
- Statement 2 is Incorrect. Public goods are non-rivalrous, not rivalrous. Non-rivalry means that consumption by one individual does not reduce the availability of the good for others. Rivalrous goods are typically private goods (e.g., an apple; if one person eats it, another cannot).
- Statement 3 is Correct. Because public goods are non-excludable, it is difficult to enforce payment or collect fees directly from users. Since private firms cannot ensure revenue generation through direct sales, the market fails to provide these goods, necessitating government provision funded by taxes.
Key Takeaway
Public Goods are defined by two essential characteristics: Non-Excludability (leading to the free-rider problem) and Non-Rivalry (consumption does not deplete supply). These features cause market failure, requiring government intervention.