2.9 Public goods

Characteristics of Private Goods

Private goods are excludable, meaning firms can exclude customers via the price mechanism, and rivalrous, meaning consumption by one person reduces the amount available for others.

Definition of Public Goods

Goods that are beneficial to society (e.g., national\ defence, parks) but are not provided by private firms because they are non-excludable and non-rivalrous.

Non-excludability

The inability of private firms to exclude certain customers from using a product because the price mechanism cannot be applied. An example is street\ lighting.

Non-rivalry

A characteristic where a product is not 'used up' during consumption, meaning there is no competitive rivalry to drive up prices or generate profits for firms.

The 'Free Rider' Problem

A situation where consumers access a good without paying, leading paying customers to stop payment over time. This results in firms ceasing provision and the good becoming under-provided in society.

Public Goods vs. Merit Goods

Private firms will not provide public goods at all, leading to zero provision. Conversely, private firms will provide merit goods for profit, but high prices result in under-provision as not everyone can afford them.

Government Responses to Under-provision

Governments have 3 main responses:

1. Do nothing: No provision offered.

2. Provide the service directly: e.g., libraries or parks.

3. Contract out: Pay a private company to provide the good after selecting the lowest-priced bid.

Opportunity Cost of Public Provision

Since government funding is required for direct provision or contracting out, every funding decision involves an opportunity cost representing the benefits lost from the next best alternative.