Micro 6.3 Public Goods (Rival vs Non-rival and Excludable vs Non-excludable goods)

Introduction to Public Goods

Host: Jacob Reed from ReviewEcon.comTopic: Public goods and their relation to market failures.Encouragement to use ReviewEcon.com for additional resources, specifically the Total Review Booklet for exam preparation.

Market Failures and Public Goods

Public goods are intrinsically linked to a specific type of market failure, where goods become underprovided in a free market due to their unique characteristics.

Rival vs Non-Rival Goods

Rival Goods

• Definition: Goods that diminish in availability when consumed by one person, meaning that one individual's consumption reduces the quantity available for others.

• Example: Donuts - once eaten, the remaining quantity decreases for everyone else.

• Implication: Markets effectively allocate rival goods as prices can reflect scarcity and demand.

Non-Rival Goods

• Definition: Goods that are not diminished in quantity despite consumption by multiple people.

• Example: Streaming music services - multiple users can listen simultaneously without depleting the service for others.

• Result: The marginal cost of production for non-rival goods typically approaches zero, allowing for potentially unlimited access.

Pricing and Production for Non-Rival Goods

Demand Curve for Non-Rival Goods

• Marginal Cost (MC) = 0

• Production occurs where Marginal Revenue (MR) equals MC.

• In a free market without regulation, the price and quantity produced will often exceed the socially optimal price (Ps) and quantity (Qs).

Deadweight Loss

• Illustrated as a triangle on a graph representing the lost welfare due to the underproduction of non-rival goods, often leading to inefficiencies in resource allocation.

Excludable vs Non-Excludable Goods

Excludable Goods

• Definition: Goods that can be restricted by payment, allowing producers to exclude non-payers.

• Example: Concert tickets - only those who purchase tickets can attend the event.

Non-Excludable Goods

• Definition: Goods that are accessible to everyone without payment.

• Example: Public fireworks displays - anyone within viewing range can watch without paying.

• Consequence: The inability to exclude non-payers leads to the ‘Free Rider Problem,’ where individuals benefit from goods they do not pay for, resulting in underproduction.

Free Rider Problem

• Definition: A situation where individuals can benefit from non-excludable goods without paying, leading to a market failure.

• Consequence: This phenomenon results in a market equilibrium quantity (QE) that is less than what is socially optimal (Qs).

• Extreme Cases: Could result in zero production altogether and significant deadweight loss.

Classifying Goods

Categories of Goods Based on Rivalry and Excludability

• Private Goods

  • Characteristics: Both rival and excludable.

  • Example: Wireless phone service - usage depletes availability, and access requires payment.

• Natural Monopoly Goods (Club Goods)

  • Characteristics: Non-rival but excludable.

  • Example: Video streaming services, internet providers, where potential subscribers can be excluded but usage does not impact service availability.

  • Typically associated with low marginal costs of production, making them less sensitive to additional users.

• Public Resources

  • Characteristics: Rival and non-excludable.

  • Example: Fish in oceans - may be depleted through overfishing, but access is difficult to regulate.

  • Risks: Can lead to the tragedy of the commons, highlighting the necessity for government regulation to ensure sustainable use.

• Public Goods

  • Characteristics: Non-rival and non-excludable, meaning all individuals can benefit from them without competition or exclusion.

  • Example: National defense - provides protection to all citizens without diminishing the security of others.

  • Government Role: Given the nature of public goods, the government steps in to fund and provide these goods to address market failures and ensure an efficient allocation of resources.

Conclusion

The discussion emphasizes the crucial role of government in the public provision of goods to ensure efficiency in their production and distribution, counteracting the underproduction associated with market failures.Call to Action: Engage with interactive tools on ReviewEcon.com to practice understanding the distinctions between various goods and utilize the Total Review Booklet for comprehensive exam preparation.