1.3.3 - Public goods

Private goods (characterised by 2 key features)

Rivalry - consumption by one individual reduced the availability of the good for others

Excludability - Producers can prevent individuals from consuming the good if they do not pay for it

Example of a private good

A sandwich is a private good. If one person eats the sandwich, it is no longer available for others, and it can be easily withheld from those who do not pay for it.

Public goods (characterised by 2 key features)

Non-rivalry - consumption by one individual doesn’t reduce the availability of the goods for others; it is ‘non-depletable’

Non-excludability - it is difficult or costly to prevent individuals from benefitting from the good, regardless of whether they pay for it

Example of a public good

National defence is a classic example of a public good. The protection provided by the military benefits all citizens, and it is challenging to exclude non-payers from this benefit

Why might public goods not be provided by the private sector? (usually free market economies)

Due to the free rider problem

What is the free rider problem?

• Occurs when individuals can benefit from a public good without having to pay for it

• Since it is difficult to exclude non-payers, individuals may choose not to pay for the good, assuming that other will pay + they can still enjoy the benefits

• This leads to underfunding or underproduction of public goods in the private market

Example of the free rider problem

A fireworks display in a park. If the cost of display is borne by one person or a few people, others can enjoy the show without contributing financially. Many individuals may decide not to contribute, assuming that the display will proceed regardless, resulting in insufficient funding

What is the role of the government in providing public goods? How are they funded? What is this known as?

→ Since the private sector are unlikely to adequately supply public goods

The gov steps in → gov can finance public goods through taxation, ensuring that everyone pays their fair share

This is known as government provision

Example of gov provision

Public parks or public schools, where taxes fund the development + maintenance, allowing all members of the community to benefit regardless of individual contributions → this overcomes the free rider problem

What are quasi-public goods?

Exhibit characteristics of both public + private goods

May have elements of non-rivalry or non-excludability but not to same extent as pure public goods

Example of a quasi-public good

Public libraries or toll roads, which are accessible to all but may require some level of payment or have limits on use

Advantages of state provision of public goods

→ Overcomes free-rider problem

→ Ensures universal access + equity - regardless of income or social status

→ Reduces market inefficiencies by optimizing resource allocation + funding essential services

→ (Achieves economies of scale - the more you produce, the cheaper (per unit) it gets) - e.g. amazon - bulk buying + distribution

Disadvantages of state provision of public goods

→ Inefficiency + bureaucracy - without pressure of competition, less incentive to minimise costs or innovate

→ High tax burden - on citizens to fund public goods provision, which can lead to public resentment + decreased support for government initiatives

→ Potential for misallocation of resources due to political motivations instead of market demands

→ Risk of government failure - gov can make poor decisions e.g. misallocating resources