A public good has two characteristics:
- Non-rivalry: This means that when a good is consumed, it doesn’t reduce the amount available for others.
– E.g. benefiting from a street light doesn’t reduce the light available for others but eating an apple would. - Non-excludability: This occurs when it is not possible to provide a good without it being possible for others to enjoy. For example, if you erect a dam to stop flooding – you protect everyone in the area (whether they contributed to flooding defences or not.
A public good is often (though not always) under-provided in a free market because its characteristics of non-rivalry and non-excludability mean there is an incentive not to pay. In a free market, firms may not provide the good as they have difficulty charging people for their use.
Free rider problem
The problem with public goods is that they have a free-rider problem. This means that it is not possible to prevent anyone from enjoying a good, once it has been provided. Therefore there is no incentive for people to pay for the good because they can consume it without paying for it.
- However, this will lead to there being no good being provided.
- Therefore there will be social inefficiency.
- Therefore there will be a need for the govt to provide it directly out of general taxation.
Examples of Public Goods
- National defence. If you protect the country from invasion, it benefits everyone in the country.
- Street lighting. If you provide light at night, you can’t stop anyone consuming the good. Walking under a street light doesn’t reduce the amount of light for others.
- Police service. If you provide law and order, everyone in the community will benefit from improved security and reduced crime.
- Flood defences – Protecting the coastline against flooding provides benefits for the whole community.
- The internet. Once websites are provided, everyone can see the website for free, without reducing the amount available to others. (assuming an individual can access for free, which is not always the case)
Quasi-Public Goods
These are goods which have an element of non-excludability and non-rivalry. Roads are a good example. Once provided most people can use them, for example, those who have a driving licence. However, when you use a road, the amount others can benefit is reduced to some extent, because there will be increased congestion.
Market provision of public goods
Although classical economic theory suggests public goods will not be provided by a free market, there are cases when groups of individuals can come together to voluntarily provide public goods.
Behavioural economics suggests that individuals can have motivations other than just money. People may volunteer to contribute to local flood defences out of a sense of civic pride, peer pressure or genuine altruism. Therefore, in the real world, enough people may contribute to paying for a public good, even if – from a narrow self-interest point of view – it may be rational to avoid paying.
Examples of market provision of public goods include:
- Local communities providing private policing
- Local communities raising money to pay for a local school, new garden or new statue.
Difference between public spending and public goods
One possible area of confusion. We talk about public spending. This is spending done by the government. E.g. UK public spending
However, not all government (public) spending is on ‘public goods’, e.g. the government will also spend on other goods and services, .e.g. – merit goods, like education and healthcare.
Related
- Public goods – police and fire services
- Private, public and free goods
What is common to the greatest number gets the least amount of care. Men pay most attention to what is their own; they care less for what is common; or at any rate they care for it only to the extent to which each is individually concerned. - Aristotle
The above quote by Aristotle represents the fundamental idea behind the tragedy of commons, a phenomenon that often occurs with the consumption of private goods. Follow along to understand the differences between private, public, and quasi-public goods and their implications.
A public good possesses the following characteristics:
- Non-excludable: consumers can’t be excluded from using the product.
- Non-rival: if one person uses a public good, it does not reduce its availability for others to use.
Street lighting is an example of a public good. This is a service that all citizens get to enjoy no matter how much they pay in taxes. Additionally, if one person is using the street lights, it does not exclude others from using them.
Theoretically, it would be possible to provide public goods privately. However, if people decide not to pay, it leads to market failure, as it is impossible to exclude the ‘non-payers’ from using the public good. Further examples of public goods include national defence, public roads, motorways, and bridges.
A public good is both non-rival and non-excludable.
To better understand what public goods are, let’s take a look at the definition of private goods.
Private goods
Private goods constitute the majority of goods there are. They have the following characteristics:
- Excludable: the owners of the good can prevent others from consuming it.
- Rival: when a consumer consumes a private good, they diminish the available quantity of that good to other consumers.
A house is an example of a private good. The house owner can exclude you from using or buying their house (the good is excludable).
An example of rivalry can be a bag of crisps. If you eat the last bag of crisps at home, your family couldn’t eat it and the available quantity of crisps decreases for them. In other words, the quantity you consumed diminished the amount available to others.
A private good - is both rival and excludable.
Public goods can be differentiated into two categories: pure public goods and quasi-public goods.
A pure public good is a good that is fully non-rival and non-excludable.
National defence is a pure public good since it is impossible to exclude free-riders.
The majority of public goods, however, are quasi-public or non-pure public goods.
Quasi-public goods have characteristics of both private and public goods, including partial excludability and partial rivalry.
For these types of goods, certain methods can be implemented to exclude free-riders.
A government can put new tolls on a motorway to exclude free riders.
The market can provide these types of goods. However, taking into account the concept of non-rivalry, it can be beneficial to provide public goods for free in order to encourage as much consumption of them as possible.
In other words, if public and quasi-public goods don’t have capacity restraints, optimal consumption levels take place when they are provided for free.
Imagine if street lighting wasn’t a public good. In this case, a company would set up street lighting and charge people for using it in an attempt to make a profit. However, even if none or very few people ended up paying for street lighting services, the community would still enjoy all the benefits of having street lighting. This is known as the free-rider problem. The price mechanism fails if there are free riders, as consumers will not choose to pay for a good they can get for free.
The free-rider problem occurs when, due to the non-excludable nature of public goods, consumers decide to not pay for the good at all and 'free-ride' instead.
Free-riding minimises profits for the company, as it is not possible for them to exclude the non-payers from using the service whilst still providing it to paying customers. Removing street lighting from the non-payers will remove street lighting for everyone. As a result, there is no incentive to provide public goods privately through the market. This is the idea behind a missing market, which results in market failure.
Missing markets occur when there is no incentive to provide a good through the market due to the free-rider problem.
Additionally, it is complicated to set the correct prices for public goods, as it is difficult to know how much value they will create for consumers. Producers are likely to overvalue the benefits of public goods in order to increase prices and therefore their profits. Meanwhile, consumers tend to undervalue these benefits in order to receive lower prices. This results in market failure.
This is another reason why firms might be disincentivised to provide public goods, leading to market failure and resulting in governments having to provide public goods.
The tragedy of the commons is an economic concept that suggests that people will always act in their own self-interest and overconsume common resources. As a result, common resources are destroyed or depleted. We can explain a lot of the environmental market failure by applying the concept of the tragedy of the commons.
Let’s say that a large public lake is used by many locals and fishermen as a fishing destination. They use the resource because it’s free, public, and belongs to everyone. However, after a couple of years, the fishermen notice that they can barely catch any fish. The lake has become depleted of resources. This is because people were acting in their own interest and overconsuming the resource without making any effort to conserve the lake and the ecosystem within the lake. As a result, no one can use the lake anymore.
Recent technological advances make it possible for governments to charge prices on quasi-public goods.
License plate recognition and other new technological measures allow for governments and local transport authorities to charge motor vehicles for using roads. This was previously not possible due to the lack of technical means to do so.
This type of technology also allows the government to charge different prices during different hours of the day to disincentivise people from using their vehicles during rush hour. For example, when roads are not congested and thus non-rival, it is possible to charge drivers less than during rush hour when rivalry is high.
The answer to whether public goods could be provided privately is far from simple. Even though people might be willing to pay for certain public goods and willing to pay to avoid certain public 'bads', it is unlikely that we will ever get rid of the free-rider problem.
Public Goods - Key takeaways
- Public goods are non-excludable and non-rival.
- Private goods are excludable and rival.
- Theoretically, it would be possible to provide public goods privately. However, if people decide to not pay, it leads to market failure, as it is impossible to exclude the ‘non-payers’ from using the public good.
- Public goods lead to problems with free riders, who enjoy the good without paying for it.
- The free-rider problem occurs when, due to the non-excludable nature of public goods, consumers decide to not pay for the good at all and 'ride free' instead.
- Missing markets occur when there is no incentive to provide a good through the market due to the free-rider problem.
- It is complicated to set the correct prices for public goods, as it is difficult to know how much value they will create for consumers.
- The tragedy of the commons is an economic concept that suggests that people will always act in their own self-interest and overconsume common resources.
- Quasi-public goods can be provided by the market. However, it can be beneficial to provide public goods for free in order to encourage as much consumption as possible.
A public good is defined as a good that is both non-excludable and non-rival.
Public goods are non-excludable, non-rival and non-rejectable.
Public goods are non-excludable, meaning consumers cannot be excluded from using them, and non-rival, meaning if one person uses a public good, it does not reduce its availability for others.
Private goods are excludable, as the owners of the good can prevent others from consuming it, and rival, as when a consumer consumes a private good, they diminish the quantity of that private good available to others.
Public goods exist in order to avoid the free-rider problem from causing missing markets and ultimately market failure.
Public goods are beneficial as they allow for all members of society to have access to certain essential goods and services they otherwise might not have been able to access if they weren't public goods.
Question
Name the two characteristics of private goods.
Answer
They are excludable and rival.
Question
Name an example of a private good.
Answer
Question
Explain the idea of rivalry in relation to private goods.
Answer
When a consumer consumes a private good, they diminish the quantity of that private good available to other consumers.
Question
Name two characteristics of a public good.
Answer
They are non-excludable and non-rival.
Question
Name an example of a public good.
Answer
Question
What is the free-rider problem?
Answer
Even if only a few people pay for the public good, everyone can still enjoy all its benefits for free.
Question
How do 'free-riders' impact the price mechanism?
Answer
The price mechanism fails if there are free riders, as consumers will not choose to pay for a good they can get for free.
Question
Why is it complicated to set prices for public goods?
Answer
It is difficult to estimate how much value they will create for consumers.
Question
Why do governments have to provide public goods?
Answer
Without governments providing public goods, they would result in market failure.
Question
Explain the tragedy of the commons.
Answer
The tragedy of the commons is an economic concept that suggests that people will always act in their own self-interest and overconsume common resources. As a result, the common resource is destroyed and/or depleted.
Question
What is a quasi-public good?
Answer
A good for which certain methods could be implemented to exclude free-riders.
Question
Name an example of a pure public good.
Answer
National defence is a pure public good since it is impossible to exclude free riders.
Question
Name an example of a quasi-public good.
Answer
Tolls. They can be implemented on motorways in order to exclude free-riders.
Question
Why is it beneficial to provide public goods for free?
Answer
If there are no capacity restraints on public and quasi-public goods, optimal consumption levels take place when they are provided for free.
Question
What is the significance of technological change in providing quasi-public goods?
Answer
Technological advances make it possible for governments to charge prices on quasi-public goods.