4.1.8.3 - Public goods, Private goods, Quasi-public goods

Public Good

Goods that are not provided in a market because it is non-excludable and non-rivalrous

[define non-excludable & non-rivalrous in exam definition]

2 Main Characteristics of Public Goods

- Non-Excludable

- Non-Rivalry

Private Good

Goods that are excludable, rivalrous and rejectable

Non-excludable =

Consumers cannot be excluded from consuming the product even if they didn't pay for it.

If provided for one person, anyone can accesss them.

(free rider problem)

Non-rivalry =

One person's consumption of a product does not reduce the amount available for other people to consume

Rejectability

Private goods and services can be rejected as a person may not wish to buy them (have a choice whether to consume)

Quasi-Public Good

A good which is partly rivalrous and partly excludable.

- exhibits some but not all the characteristics of a public good.

Why do Public Goods lead to Market Failure?

The FREE RIDER PROBLEM - When people can enjoy the benefits of consumption without paying anything for it.

- If you cannot exclude the non-payers, profit-motivated businesses may decide not to supply these products.

- This is as there is a loss of the incentive function to provide these goods, therefore the good becomes under-provided, resulting in a missing market - complete market failure.

Public Goods Market Failure Free Rider Problem Chain of Analysis

- Public goods are subject to the free rider problem, where people can enjoy the benefits of consumption without paying anything for it.

- This is due to the public goods being 'non-excludable' meaning non-payers cannot be excluded from consuming the product.

- This means individuals have no incentive to pay for the good.

- If individuals aren't willing to pay for it, firms cannot make money from producing the good.

- Therefore, profit-motivated firms would decide not to supply these products.

- As a result, the public goods become under-provided if left to the free market, resulting in a MISSING MARKET.

- There is under allocation of scarce resources to this particular market, in fact none are allocated at all.

- Therefore, the free market mechanism has caused allocative inefficiency and a loss in welfare, resulting in complete market failure.

How can the Government solve the Market Failure of Public Goods?

- State Provision

- Subsidies

- Charge Consumers for public goods (e.g. tolls on roads)

- Regulation

Technological Change/Advancements (& its implication for public goods)

The process of innovation, invention and the widespread use of technology in society. This means that public goods can become private goods over time.

How has Technological Change impacted the nature of Public Goods?

- Technological advancements have made pure public goods more excludable, thus transforming them into more of a private good, or a quasi-public good.

- For example, encryption has allowed TV broadcasting to only stream to paying subscribers, thus making the service excludable to non-payers.

- This, in turn, means that firms can now make money from producing this service, encouraging firms to enter the market.

- So it reduces the under-provision and solves the problem of missing markets.

- Therefore, solving the market failure and reduces the need for government intervention.

The Tragedy of the Commons

A situation where individuals acting independently and rationally in their own self-interest behave contrary to the best interests of society by depleting a common resource.

Common Resource

A natural resource with no private ownership, which is non-excludable, but is rivalrous in consumption.

Why does the Tragedy of the Commons occur?

- There is an absence of property rights on the common resource as it has no private ownership.

- It is unregulated as there is no market in place to manage the allocation of these common resources

- As no one owns the resource and it is non-excludable, no one personally suffers the consequences of depleting it.

- As people will act in their self-interest (+ moral hazard), people have no incentive to look after the good

- This can lead to exploitation and overuse of the resource, leading to its depletion if used unsustainably.

- Leads to negative externalities in consumption, hence market failure

How can the Government solve the Market Failure of the Tragedy of the Commons?

Extend Property Rights to create a market/private good

Examples of the Tragedy of the Commons:

- Overfishing - As fishers have an incentive to maximise profits of selling fish, they attempt to catch as many as possible --> Decline in fish population --> Depletes population of fish to unsustainable levels --> Habitat degradation & less available resource of fish in the long-run

- Deforestation

- Litter

- Tasty Animals

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