PUBLIC GOODS

THE DISTINCTION BETWEEN PRIVATE GOODS AND PURE

PUBLIC GOODS

A private good is both rivalrous and excludable.

Rivalrous means that when a person buys and consumes the good the amount of goods
available for others to buy diminishes. In other words, after a person has bought the good,
that good is not available for others to buy. There is competition/rivalry for the good.
Excludable means that when the good is produced and sent to market it is possible for the
producer to stop people from enjoying the benefits gained from the consumption of it.
A Mars bar is an example of a private goods. It is rivalrous (some textbooks use the term
diminishable) because once the Mars bar is consumed that same bar is no longer available
for others to consume. The amount of Mars bars available diminishes.
A Mars bar is excludable because once sent to market it is possible to stop people from
enjoying the benefits gained from its consumption. Simply put, if the person does not pay
for the Mars bar she/he will not get and consume the bar. People can be excluded from
enjoying the benefits.
 THE DISTINCTION BETWEEN PRIVATE GOODS AND PURE PUBLIC
GOODS
A pure public good, on the other hand, is non-rivalrous (non-diminishable) and non-excludable.
Non-rivalrous (Non-diminishable) means consumption of the good by one person does not diminish the amount of the good
available for others. There is no competition or rivalry between people for the good.
Non-excludable means that once the good has been provided the producer is not able to exclude/stop people from enjoying the
benefits from its consumption.
A typical pure public good that is cited in text books is a lighthouse. One ship ‘consuming’ the benefits of offered by the
lighthouse does not diminish the amount available to others, thus it is non-rivalrous. And it is not possible for the provider of
this service to exclude sailors from enjoying the benefits of the service once provided, thus it is non-excludable.
PURE PUBLIC GOOD
Another example of a pure public good is national defence. One
citizen enjoying the benefits of national security does not diminish
the amount available for others to enjoy. And once provided it is
impossible to stop people from enjoying the benefits national
defence provides.
Flood defences built are public goods: once provided consumption
does not diminish the amount available for others and it is non
excludable because once provided people cannot be stopped
enjoying the benefit provided by the flood defence – it is non-
excludable
A pure public good is entirely non-rivalrous and non-
excludable.
 THE FREE-RIDER PROBLEM
There are benefits, both private and external, that society enjoys, created by the consumption of public
goods. And there are costs involved in producing those goods.
The social optimum level of output/consumption is where MSC=MSB, as explained in previous lessons.
However, LEFT TO THE FREE MARKET, there would be no production of public goods. Output and
consumption would be zero.
This is the case because of THE FREE RIDER PROBLEM.
A private firm WILL NOT PRODUCE PURE PUBLIC GOODS because they are non-excludable.
Once provided it is impossible for the private firm to exclude people from enjoying the benefits.
Therefore, people would NOT HAVE TO PAY in order to enjoy the benefits. So many will not pay in the
hope that they can free ride on those that will pay.
For example, if a private firm erected street lights, the vast majority of people would not pay for the use
of them, because once provided, people cannot be stopped/excluded from enjoying the benefits.
The private firm would incur costs but would not receive enough revenue to cover the costs and
therefore would be unable to make a profit from the enterprise – AND THEREFORE THE PUBLIC
GOOD WOULD NOT BE PROVIDED IN A FREE MARKET.
WELFARE LOSS
Society’s welfare is maximised where production and consumption is at the equilibrium
P,Q. But output and consumption of a pure public good will be zero due to the free rider
problem. There is a welfare loss on all units between 0 and Q. The sum of the welfare loss
is represented by the large shaded area. There is a misallocation of resources – no resources
are allocated to the production of the pure public good left to the free market. Society will
lose all benefit available from the consumption of the good.
 CORRECTION OF MARKET FAILURE
Pure public goods will not be provided in a free market leading to a welfare loss. Therefore the
government must intervene in order to achieve allocative efficiency. The government must allocated
sufficient resources to the production of the pure public good to ensure output and consumption is
where MSC = MSB.
So the government will allocate resources directly and provide the good. For example taxpayers fund
the provision of flood defences, national defence, street lighting, pavements and many others. In this
way society’s welfare can be maximised.
The government often pays private firms to provide the goods through subsidies that cover all the
costs of production.
 QUASI-PUBLIC GOODS
A quasi-public shares some of the characteristics of a pure public good but not to the same extent.
It is non-rivalrous and non-excludable only to a certain extent.
For example a motorway is an example of quasi-public good.
At quiet times one person driving on a motorway does not diminish, in any meaningful sense, the
amount of space on the motorway available for others to enjoy.
However, at busy times, the next person using the road does begin to cause congestion and queues begin
to form. At some point the amount available to others does start to diminish. So to a certain extent,
depending on the time of day for example, a motorway is non-rivalrous, or indeed rivalrous.
Once the motorway is provided, it is possible to stop people from enjoying the benefits gained from
using it. Tolls can be constructed and if the person does not pay he/she can be stopped from enjoying the
benefits of using it.
However, the costs of road construction is extremely high therefore a motorway would not be built
without government expenditure. A private firm that built, operated and owned a motorway would not
be able to recover its costs via toll charges. It would not be a profitable enterprise.
 QUASI-PUBLIC GOODS
Quasi-public goods – definition
Quasi-public goods have characteristics of both private and public goods, including partial
excludability, partial rivalry, partial diminishability. Examples include roads, tunnels and bridges.
Markets for these goods are considered to be incomplete markets and their lack of provision by free
markets would be considered to be inefficient and a market failure.
For example, private enterprise could provide some bridges, roads and tunnels if a charging system
could be applied which solves the free rider problem.
However, it is unlikely that all an economy’s (households and firm’s) need for transport and
infrastructure could be met this way. Indeed, toll charge systems could be regarded as inefficient in that
traffic slows down to pay at the toll booth, and traffic builds up causing congestion and increased
external costs.
However, the introduction of new technology, such as ‘smarter’ payments systems and number-plate
recognition technology means that the free rider problem can be reduced or eliminated and the price
mechanism can operate. Hence, over time, technology can convert public goods to quasi-public goods,
and eventually to private goods
 HOMEWORK
Essay:
Explain why the free rider causes the free market for pure public goods to fail (10)
Write an introduction in which you define key terms in the question.
Take time to plan and structure your answer before you write up your essay. This is to ensure that
your chains of reasoning are logical, coherent and detailed. And that there are no links missing. You
should take a step by step approach. But be succinct – no superfluous verbiage.
Explain/define key terms employed in the essay.
Write a pithy conclusion e.g. ‘As I have explained, because people can not be excluded from
enjoying the benefits gained from the consumption of a pure public good once it has been provided
they do not have an incentive to pay, thus many will not pay but attempt to ‘free ride’ instead. Thus
the production of the good by the private sector will generate no profit and, for this reason, output
will be zero. Therefore, the free market will fail.