Public Goods, Asymmetric Information and the Reasons for Developing 5G Networks

Question

Countries all over the world are racing to build fifth-generation (5G) networks. When fully operational, 5G networks will enable new technologies such as autonomous vehicles and cloud gaming to become a reality. They could open up the so-called Internet of Things, where many devices are connected — robots, cars, fridges. These ultra-fast networks are seen as vital in the push to develop “smart cities”.

(a) Explain, using examples, how the market fails in the case of public goods and where there is asymmetric information. [10]

(b) Discuss whether the main reason for governments’ development of 5G networks is to correct both the abovementioned sources of market failure. [15]

Answer

Part (a)

Public goods. A public good is non-excludable and non-rival in consumption, and these characteristics cause the free market to fail to allocate resources to it.

Non-excludability — the free-rider problem. Where it is impossible or prohibitively costly to exclude non-payers, consumers free-ride. Once an army defends a country, every citizen benefits whether or not they pay, so no rational, self-interested consumer reveals his effective demand, and there are no price signals to convey preferences to producers.

Non-rivalry — the zero efficient price. Where one person’s consumption does not reduce another’s, the marginal cost of an additional consumer is zero, so the allocatively efficient price (P = MC) is zero. A profit-maximising firm will charge a positive price, so the socially efficient output is never produced by the market. With no price signal and no profit, the market fails completely, and the government must provide the good.

Asymmetric information. Asymmetric information arises when the parties to a transaction hold unequal knowledge, letting the better-informed party exploit the other and producing adverse selection and moral hazard that shrink or eliminate the market.

Adverse selection. Used-car dealers know more about a car’s condition than buyers and may conceal it. Anticipating this, buyers lower the price they will pay to reflect the risk of a low-quality car. At that lower price, owners of good cars withdraw, so the market adversely selects for low quality — in the extreme, only poor cars are traded. The market for good used cars fails.

Moral hazard. This arises after a transaction. With car insurance, a driver who knows the insurer bears accident costs may drive more recklessly, raising accident rates. Insurers respond by raising premiums; safe drivers find the higher premium not worthwhile and exit, leaving a market of reckless drivers and a missing market for safe ones — a partial market failure.

Part (b)

This part argues that, while asymmetric information offers a partial reason for government involvement in 5G and the public-good argument does not apply, the main reason governments develop 5G networks is to achieve economic growth and competitiveness rather than to correct either failure named in the question.

Public goods — not the reason. Although a 5G network is arguably non-rival — its bandwidth is large enough that additional users need not slow it, and the marginal cost of an extra user is negligible — it is plainly excludable: non-payers can be denied access. A 5G network is therefore not a pure public good, and the public-good rationale for provision does not hold. (At awareness level, one might add that the high fixed and negligible marginal costs give 5G the cost structure of a natural monopoly, which could justify price regulation or public involvement on market-power rather than public-good grounds; the syllabus excludes the cost-revenue diagrammatic analysis of this, so the point is noted in prose only.)

Asymmetric information — a partial reason. There is a limited case here. Telcos know more about 5G’s benefits than consumers and could mislead them; wary consumers may then under-subscribe, and if too few subscribe the build cost cannot be recovered, so telcos may decline to build — a missing-market outcome from adverse selection that could justify government funding or regulation of telco advertising. Separately, 5G itself can reduce asymmetric information elsewhere: faster, more reliable Internet-of-Things connectivity lets insurers monitor driving or health behaviour and price premiums to risk, mitigating moral hazard. But this argument is weak as a primary motive: closing the consumer-information gap requires only that telco claims be regulated, not that the state build or fund the network, and the existing network already suffices for most information-sharing.

The main reason — economic growth. The stronger explanation is economic growth and competitiveness. Investment in 5G raises aggregate demand and expands productive capacity, supporting both short-run and long-run growth, and world-class digital infrastructure keeps the economy relevant and attractive to investment — enabling the “smart cities”, autonomous vehicles and Internet-of-Things applications the stem describes. For a small, resource-scarce economy like Singapore, building such capabilities is a principal route to sustaining investment and export competitiveness. (One could also frame 5G as a merit good under-consumed because of positive externalities and imperfect information, but in context the growth argument is the more convincing “other reason”.)

Evaluation and judgement. Weighing the three, the public-good argument is clearly not the reason, since 5G is excludable and the market can provide it. The asymmetric-information argument is real but secondary: it justifies at most regulation of telco claims, not the state-led build-out that “development of 5G networks” implies, and 5G’s promise to cure asymmetries elsewhere is hedged by the many traits that remain unobservable. What is undeniable is that world-class infrastructure helps an economy stay competitive and attract investment — especially vital for a small economy that must build new capabilities to grow. The reasoned verdict is therefore that the main reason governments develop 5G networks is to achieve economic growth and competitiveness, with the correction of asymmetric information a subsidiary consideration and public goods not a reason at all.