Public Goods (also a kind of Market failure)
Public Goods & Private Goods
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.
Public goods ARE NOT GOODS PROVIDED BY THE GOVERNMENT
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.
E.g.1 using these concepts, a Speedy’s pizza is clearly a private good.
E.g. 2 increasing use of “pay-per-view”(e.g. netflix → if you don’t pay can’t
watch) 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.
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 Speedys, that pizza is no longer available to
someone else.
3. Rejectability: Private goods and services can be rejected - you can choose not to
buy a Speedy’s pizza tonight and instead use your money to buy a Dixies chicken
selection. All private goods and services can be rejected by the final consumer
should their tastes and preferences change.
Public goods
Public Goods have characteristics of non-excludability and non-rivalry. If left to the free
market, public goods are under-provided and under-consumed leading to a loss of social
welfare.
Characteristics of Public Goods
As one might expect, the characteristics of pure public goods are the opposite of private
goods:
1. 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! Just consider the SMH Fireworks display as
a good example of free-riders from the College.
E.g. Street lights
Public Goods & Private Goods
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.
Public goods ARE NOT GOODS PROVIDED BY THE GOVERNMENT
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.
E.g.1 using these concepts, a Speedy’s pizza is clearly a private good.
E.g. 2 increasing use of “pay-per-view”(e.g. netflix → if you don’t pay can’t
watch) 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.
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 Speedys, that pizza is no longer available to
someone else.
3. Rejectability: Private goods and services can be rejected - you can choose not to
buy a Speedy’s pizza tonight and instead use your money to buy a Dixies chicken
selection. All private goods and services can be rejected by the final consumer
should their tastes and preferences change.
Public goods
Public Goods have characteristics of non-excludability and non-rivalry. If left to the free
market, public goods are under-provided and under-consumed leading to a loss of social
welfare.
Characteristics of Public Goods
As one might expect, the characteristics of pure public goods are the opposite of private
goods:
1. 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! Just consider the SMH Fireworks display as
a good example of free-riders from the College.
E.g. Street lights
