Public Goods
AS economics revision presentation on the characteristics of
public goods and the link between public goods and market
failure
Public Goods
Public goods have two main characteristics:
Non-excludability:
The benefits of public goods cannot be confined to only those
who have paid for it
Non-payers can enjoy the benefits of consumption for no
financial cost
Non-rivalry in consumption:
Consumption of a public good by one person does not reduce
the availability of a good to others
We all consume the same amount of public goods even though
our tastes for these goods (and therefore our valuation of the
benefit we derive from them) might differ
Private Goods
Excludability:
Consumers of private goods can be excluded from consuming
the product if they are not willing or able to pay for it (for
example - a ticket to the theatre or a sports event or a meal in a
restaurant)
Rivalry:
With a private good, one person's consumption of a product
reduces the amount left for others to consume - because scarce
resources are used up in producing and supplying the good or
service
Rejectable Goods:
Private goods and services can be rejected
Pure Public Goods
Pure Public Goods
National Defence Systems (i.e. the nuclear deterrent)
Sewage and Waste Disposal Systems
Lighthouse Protection
National Rail Safety Systems
Street Lighting
Firework Displays
Semi-Public Goods
Products that are public in nature, but do not exhibit fully the
features of non-excludability and non-rivalry
Some features of quasi public goods explain why they might be
provided by the private sector because consumers could be
excluded and charged a market price
But on grounds of equity the government may continue to provide
these goods directly and finance them through general taxation
Motorways and Major Roads
Parks
Terrestrial television services (public service broadcasting)
Police Force protection
Galleries and Museums
Airwaves
Public Goods and Market Failure
The free market economy will fail to deliver / allocate a socially efficient
quantity of public goods because of their characteristics
A problem arising from public goods is the free rider issue
People take a free ride when they benefit from consuming a good or service
without paying for the costs of provision
Many goods have a public element but they are not pure public goods –
e.g. a congested motorway
Pure public goods are provided collectively and financed through taxation or
other forms of compulsory charges
The key is the estimated social benefit from providing public goods
measured against the marginal cost of supplying them – this can involve a
subjective judgement on the benefits derived
Judging the Optimum Allocation of Public Goods
Optimum allocation of public goods is when the marginal
cost of supply equates with the marginal benefit to society
Costs,
from public goods
Benefits
Because public
goods are
characterised by Social Cost
being Social benefit >
collectively marginal social cost
(under-provided) Social benefit <
consumed, the marginal social cost
private sector (over-provided)
may not provide
them because
they cannot
exclude those Marginal Social Benefit
who do not pay
Q1 Qs Q2 Output
The Free Rider Problem
Consumers have an incentive to not reveal their willingness and
ability to pay for public goods if they believe that they will be
expected or required to contribute to financing the public good
Good examples to use include TV Licence dodgers and people
who choose to evade Council Tax but who still receive local
authority services
Another example might be a group of residents in a block of flats
who all stand to benefit from better lighting and security systems,
but who individually might try to avoid payment and benefit once
the improved amenities are in place
Given the nature of the free rider problem, public goods are often
financed through some form of enforcement, notably the
compulsory nature of the TV Licence fee
The Blurred Distinction between Public and Private
In recent years the distinction between what is the private and
what is the public sector has become blurred
This is mainly because of
(1) Privatisation
(2) Contracting Out
(3) Private Provision of “Public” Services
(4) Private Finance Initiative
(5) Public-Private Partnerships
The public & private sectors in the British economy are now
closely integrated
