Micro 11 - Public and Private Goods Flashcards
Public goods - definition
> Goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry.
Non-excludability definition
> Situation existing where individual consumers can’t be excluded from consumption.
non-rivalry definition
> Situation existing where consumption by one person doesn’t affect the consumption of all others.
free rider - definition
> Someone who directly benefits from a public good but who doesn’t contribute towards its provision.
Quasi-public goods definition
> These are either non-rival or non-excludable but not both.
>E.g. parks are non-excludable but rivalrous as too many people affects use.
Private goods definition
> goods that have the characteristics of excludability and rivalry.
most goods
Market Failure info
> 2 types:
1. Complete market failure.
2. Partial market failure.
Partial market failure occurs when there are externalities.
Complete market failure occurs with public goods.
Complete market failure
> Complete market failure occurs when it would be better for society if a good or service was provided but for some reason the free market, in the absence of any government intervention, fails to provide this good or service.
‘Missing market’.
What is the main reason why public goods are under-produced or not produced at all?
> The free-rider problem.
Free-rider problem
> The main reason why public goods tend to be significantly underproduced, or not produced at all, is because of the free-rider problem.
This is where someone who hasn’t paid for a good or service takes advantage of the fact that it’s non-excludable by consuming the good that others have paid for.
Example of the free-rider problem
> Streetlights.
If sufficient numbers of people aren’t willing or able to pay for the lights they are using then at any level of output the firm will be unable to cover costs and so unwilling to provide the service.
In this case, there would be a missing market and very sizeable deadweight loss.
1 solution = council charges all residents.
Changing times - public and private goods
> Technological advancements have changed out ability to exclude people from using goods that we couldn’t otherwise exclude them from.
This means that goods that were always considered public are now taking on private characteristics (e.g. broadcasting).
Conversely, there are some goods that were once more excludable that are becoming easier to access due to technological advancements, such as the ease with which we can share and access digital files that would previously have been physical (e.g. music).
Q. Explain how the free-rider problem might lead to market failure in the market for lighthouses.
1.. Define public good, non-rivalrous and non-excludable.
2. Explain why non-excludable and non-rival.
3. Complete market failure: without gov. intervention not provided by the free-market.
4. Define free-rider problem.
5. Free-rider problem makes it unattractive for a private firm as they will be unable to make a profit, costs more. Can’t force people to pay for them = can’t profit maximise.
>Diagram: costs greater than the price, can’t make a profit so private producer wouldn’t provide a public good to the market, hence there would be a missing market.
