1.3.3 Public Goods

Question 1

What are public goods?

Answer 1

Public goods are characterised as being both non-rival and nonexcludable.

Question 2

EXamples of public goods

Answer 2

Question 3

How are private goods excludable?

Answer 3

A ticket to the theatre or pay-per-view sporting events are private goods because buyers
can be excluded from enjoying the product if they are not willing and able to pay for it. Excludability
gives the seller the chance to make a profit. When goods are excludable, the owners can exercise
property rights.

Question 4

How are private goods rival in consumption?

Answer 4

If you enjoy a pizza from Dominos, that pizza is no longer available to someone
else. Likewise driving a car on a road uses up road space that is no longer available at that time to
another motorist. 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 supplying the
product.

Question 5

How are public goods non excludable?

Answer 5

The benefits derived from pure public goods cannot be confined solely to those who have paid for it.

Question 6

How are public goods non rival in consumption?

Answer 6

Consumption by one consumer does not restrict consumption by other
consumers – in other words the marginal cost of supplying a public good to an extra person is zero.
If it is supplied to one person, it is available to all.

Question 7

Why aren’t pure public goods normally provided by the private sector?

Answer 7

Pure public goods are not normally provided by the private sector because they would be unable to
supply them for a profit (due to the free rider problem…if a good is non-excludable, then it becomes
impossible to charge anyone for consuming it…and without being able to charge a price, then a firm
would gain no revenue at all)

Question 8

How does the the government decide what output of public goods is appropriate for society?

Answer 8

To do this, it must estimate the net social benefits from making public goods available. Governments
do not have to provide public goods.

Question 9

What is quasi public goods?

Answer 9

A quasi-public good is a near-public good. It has some of the characteristics of a public good
Quasi-public goods are either non-rival or non-excludable, but not both.

Question 10

Why are quasi public goods semi non rival?

Answer 10

up to a point, more consumers using a park or road do not reduce the space available
for others. But beaches can become crowded as do parks/leisure facilities. Open-access Wi-Fi
networks become crowded

Question 11

Why are quasi public goods semi non excludable?

Answer 11

it is possible but difficult or costly to exclude non-paying consumers. E.g.
fencing a park or beach and charging an entrance fee; or toll booths

Question 12

Explain the free rider problem

Answer 12

Because public goods are non-excludable it is difficult to charge people for benefitting once a product is made
available. People who use the good/service once it is provided and do not pay are known as free riders. Free
riders have no incentive to reveal how much they are willing and able to pay for a public good. The free rider
problem leads to under-provision of a good and thus causes market failure; in the case of public goods,
because everyone would be a free rider, the good is not provided at all by the private sector because they
would be unable to supply it for a profit.

Question 13

What are examples of the free rider problem?

Answer 13

Question 14

What are the advantages of state provision of public goods?

Answer 14

• The non-rival nature of consumption provides a strong case for the government to replace the market
  to provide and pay for public goods
• Many public goods are provided free at the point of use and funded by taxation or a charge such as
  the BBC’s licence fee
• State provision may help to prevent under-provision and under-consumption of public goods so that
  social welfare is improved
• If the government provides public goods, they may do so more efficiently because of economies of
  scale
• Providing essential public goods helps affordability and access to important services for lower income
  households and therefore help to address inequalities of income

Question 15

What are the disadvantages of state provision?

Answer 15

• If the government becomes a monopoly provider, there is a danger of a lack of efficiency arising from
  a lack of competition
• There are many other demands on government finances, and so there could be a significant
  opportunity cost of public goods being provided. In some cases, the state funds and the private sector
  provides public goods e.g. via Public Private Partnerships / Private Finance Initiative – although the
  track record on many of these projects suggests that the long-term cost is quite high.

Question 16

Explain common pool resources

Answer 16

• When no one owns a resource, it may get over-used, for example fish stocks and deforestation -
  people (acting in their own self-interest) benefit from using a common pool resource such as grazing
  land without regard to the effect it has on other producers.
• Over-use of a renewable resource can lead to a long-term decline in maximum sustainable yield. This
  is known as the tragedy of the commons.