Suppose the government engages in over production of a good. What are the likely effects on the private production of other goods? Explain.

Question

Suppose the government engages in over production of a good. What are the likely effects on the private production of other goods? Explain.

Answer 1

Think of the production possibilties frontier. It is concave with respect to the origin. Draw one with Government goods on the X-axis and other goods on the Y-axis. Choose a point in the middle and lable it "a." Call that the optimal point. If you move down the PPF to some point b. Government good production increases at the expense of other goods. That is resources need to be taken way from the production of other goods to expand the production of government goods.

Answer 2

I understand 'other goods' as either complements or substitutes. If that is what the question also means, then the answer is as follows:

 

If the other good is a substitute good to the good produced by the government then the private production of that good will reduce. This is so because the over production of the good will decrease its price and so people will not by its substitute. Hence, the private production of the other good (substitute good) will decrease.

 

 

If the other good is a complementary good to the good produced by the government then the private production of that good will increase. This is so because the over production of the good will decrease its price and thereby increase its demand. Since, the other good is a complement to the good produced by the government, which means both goods are used together (like toothbrush and toothpaste) so, the increase in demand for one also increases the demand for other. Hence, the private production of the other good (complement good) will increase.