Public Goods & Private Goods

Introduction
Public goods provide an example of market failure resulting from missing markets.
To understand this it is helpful first to discuss what is meant by a private good or
service.
Private Goods
A private good or service has three main characteristics:
1. Excludability: Consumers of private goods can be excluded from
consuming the product by the seller if they are not willing or able to pay
for it. For example a ticket to the theatre or a meal in a restaurant is clearly a
private good. Another example is the increasing use of pay-per-view as a
means of extracting payment from people wanting to watch exclusive
coverage of sporting events on television or the payment required to travel on
a toll-road or toll-bridge. Another example of a private good is the use
of subscription-based services on the internet. Some newspapers provide
the bulk of their news stories on the internet as a quasi public good such
as The Guardianwww.guardian.co.uk. Others are developing an alternative
business model where users can only access premium services through
password-protected parts of a web site that require payment from consumers
examples include The Economist www.economist.com and the Financial
Timeswww.ft.com. Excludability gives the service provider (the seller) the
chance to make a profit from producing and selling the product. As we shall
see, with public goods, such excludability does not exist. When goods are
excludable, the owners can exercise property rights.
2. Rivalry: With a private good, one person's consumption of a
product reduces the amount left for others to consume and benefit from because scarce resources are used up in producing and supplying the good or
service. If you order and then enjoy a pizza from Pizza Hut, that pizza is no
longer available to someone else. Likewise driving your car on a road uses up
road space that is no longer available at that time to another motorist. The
greater the volume of traffic on the roads, the higher the likelihood of traffic
congestion which has the effect of reducing the average speed and increasing
the average journey time for each road user.
3. Rejectability: Private goods and services can be rejected - if you don't like
the soup on the college or school menu, you can use your money to buy
something else! You can choose not to travel on Virgin Rail on a journey to the
North West and go instead by coach, or you can choose not to buy a season
ticket for your local soccer club and instead use the money to finance a
subscription to a local health club. All private goods and services can be
rejected by the final consumer should their tastes and preferences change.
Private and Public Goods a question of exclusion
Le Shuttle is a private good the service is excludable, rival in consumption and
rejectable. But not all providers of public goods make a profit. EuroTunnel is facing
large losses and even bigger debts!

Characteristics of Public Goods

As one might expect, the characteristics of pure public goods are the opposite of
private goods:

Non-excludability: The benefits derived from the provision of pure public

goods cannot be confined to only those who have actually paid for it. In this
sense, non-payers can enjoy the benefits of consumption at no financial cost
to themselves this is known as the free-rider problem and it means that
people have a temptation to consume without paying!

Non-rival consumption: Consumption of a public good by one person does

not reduce the availability of a good to everyone else therefore we all
consume the same amount of public goods even though our tastes and
preferences for these goods (and therefore our valuation of the benefit we
derive from them) might differ

Examples of Public Goods

There are relatively few examples of pure public goods. Examples of public goods
include flood control systems, some of the broadcasting services provided by
the BBC, public water supplies, street lightingfor roads and
motorways, lighthouse protection for ships and also national defence services.
Example: Policing a public good?
To what extent is our current system of policing an example of a public good? Some
(but not all) aspects of policing might qualify as public goods. The general protection
that the police services provide in deterring crime and investigating criminal acts
serves as a public good. But resources used up in providing specific police services
mean that fewer resources are available elsewhere. For example the use of police at
sporting events or demonstrations and protests means that police resources have to
be diverted from other policing duties. The police services must make important
decisions about how best to allocate their manpower in order to provide the most
effective policing service for the whole community.
Private protection services (including private security guards, privately bought
security systems and detectives) are private goods because the service is
excludable, rejectable and rival in consumption and people and businesses are often

prepared to pay a high price for exclusive services. A good recent example of this
has been the use of private security firms in post-war Iraq where up to 15,000
workers are said to have been working for private businesses protecting installations,
coalition buildings and convoy protection.
Public goods and market failure
Pure public goods are not normally provided at all by the private
sector because they would be unable to supply them for a profit. Thus the free
market may fail totally to provide important pure public goods and under-provide
quasi public goods (see below).
It is therefore up to the Government to decide what output of public goods is
appropriate for society. To do this, it must estimate the social benefit from the
consumption of public goods. Putting a monetary value on the benefit derived from
street lighting and defence systems is problematic. The electoral system provides an
opportunity to see the public choices of voters but elections are rarely won and lost
purely on the grounds of government spending plans and the turnout at elections
continues to fall.

The air waves a public good or a quasi public good?

The airwaves used by mobile phone companies, radio stations and television
companies are essentially owned by the government of a particular country.
Do they count as a pure public good? Normally the answer would be yes. One
persons use of the airwaves rarely reduces the extent to which other people can
benefit from utilising them. But when demand for mobile phone services is high at
peak times, the airwaves become crowded and as a result access to the networks
can become slow. In this sense the airwaves can be treated a crowded non-pure
public good.
The government also controls the issue of licences needed to operate mobile phone
services using the airwaves in the UK. In 2000, they auctioned off five licences for
3rd generation mobile phone services and raised 22 billion in doing so.
Quasi-Public Goods

Most public goods are non-pure public goods these are also known as quasi-public
goods. The main reason is that we can find ways and means of excluding some
groups from consuming them!

A quasi-public good is a near-public good i.e. it has many but not all the
characteristics of a public good. Quasi public goods are:

Semi-non-rival: up to a point, extra consumers using a park, beach or road

do not reduce the amount of the product available to other consumers.
Eventually additional consumers reduce the benefits to other users. Beaches
become crowded as do parks and other leisure facilities.

Semi-non-excludable: it is possible but often difficult or expensive to

exclude non-paying consumers. E.g. fencing a park or beach and charging an
entrance fee; building toll booths to charge for road usage on congested
routes

The diagram below is one way of illustrating the different characteristics of public
and private goods.

The BBC as a public good

Broadcasting is a good example of a public good. Let us remind ourselves of the
three main characteristics of a public good.
Firstly it is non-rival, meaning that the consumption of a public good or service by
one individual does not preclude consumption by another individual. Secondly,
consumption is non-excludable. This means that consumption by one individual
makes it impossible to exclude any other individual from having the opportunity to
consume. Effectively the cost of providing a pure public good to an extra user is
zero, and this implies that, in order to achieve allocative efficiency, the charge for
the product should be zero. Of course, in this situation, private sector businesses are
unlikely to consider providing pure public goods because they will not be able to
make any profit at a zero price, and many consumers can take a free ride on such
goods because of non-excludability.
The provision of pure public goods is therefore a cause of market failure. Left to the
free market, public goods are under-provided and under-consumed leading to a
loss of social welfare.
At the moment, around 23 million households in Britain pay an annual licence fee. All
of these people arestakeholders in the debate about the future funding of the BBC
and the vast majority use one or more BBC services at least once a week. The fee is
a means of providing collective payment for a public good. We know that there

are fee-dodgers who try to take a free-ride by avoiding payment, but there are
well established although costly means to enforce the licence fee and take nonpayers to court.
Of course the BBC is now facing huge competition from broadcasters such as Sky
who are able to exclude people from their services through the use of subscriptionbased services. Skys financial muscle continues to grow.
The case for government intervention in the case of public goods

The non-rival nature of consumption provides a strong case for the

government rather than the market to provide and pay for public goods.

Many public goods are provided more or less free at the point of use and then
paid for out of general taxation or another general form of charge such as a
licence fee.

State provision may help to prevent the under-provision and underconsumption of public goods so that social welfare is improved.

Public bads
A public bad is the opposite of a public good it provides disutility or dissatisfaction to people when consumed and therefore reduces our economic
welfare. A good example to look at would be the disposal of household and
commercial waste.
People are normally prepared to pay a price for their household waste to be collected
and disposed of in a safe and non-polluting way. But if waste was changed for
according to how much had been generated, then some people would find an
incentive to dump their waste on other peoples property and thereby avoid direct
charges.
The economics of waste is it a public bad?
Waste is now a major economic problem. As a nation, the UK generates over 430
million tonnes of waste each year, the majority coming from municipal, industrial
and commercial sources. Each household is estimated to produce over 500 kg of
waste per person each year and we throw away nearly a tonne of waste each over
the course of twelve months! Waste is a nuisance good that has a negative effect on
our welfare. From unsightly waste products to the costs of clearing up and disposing
of waste, there are many private and external costs arising from the mountain of
detritus that comes from our homes every day.
But how much are we prepared to pay for waste collection and disposal? The current
situation is that local authorities have a legal responsibility to collect household
waste once per week, the private sector market does not provide the bulk of waste
collection services for households although they have a role to play in providing
waste services for businesses and other larger organisations.
Household waste collection is nearly always done free at the point of collection.
This raises questions of equity and efficiency and also the issue of whether there are
better ways of providing incentives for us to create less waste as our living standards

improve. Why should a large family that fills many wheelie bins every week pay the
same as a single householder who creates just one or two bags worth of rubbish?
Can economists come up with good ideas to reduce waste and to give people the
right incentives to dispose of their waste in an environmentally friendly way?