Public Goods Flashcards
What is a public good?
A commodity or service that is provided without profit to all members of society, either by the government or by a private individual or organisation.
What are the two conditions for a public good?
Non-rivalrous and non-excludable. Non-rivalrous means that the goods do not dwindle in supply as more people consume them; non-excludability means that it is available to all citizens.
Missing Markets
A significant market failure is the failure to produce some goods and services, despite being needed or wanted. Markets can only form under certain conditions, and when these conditions are absent markets may struggle to exist. The most extreme case of a missing market is the case of pure public goods.
Types of Goods
Rival and Excludable: Private goods (clothes, foods, flowers)
Rival and Non-Excludable: Common goods (mines, fisheries, forests)
Non-Rival and Excludable: Club goods (cable TV, private parks, cinemas)
Non-Rival and Non-Excludable: Public goods (air, news, sunshine)
Pure Public Goods
Pure public goods clearly provide a benefit to the consumer, but, for several reasons, are unlikely to exist in a market economy. Examples of pure public goods include national defence, the police service and street lighting. Because markets for these goods are not likely to form they are called missing markets and are considered a special case where demand exists, but supply is absent.
This market mechanism is likely to fail to supply pure public goods because entrepreneurs are unlikely to enter the market, given the impossibility of charging consumers at the point of consumption.
Non-Excludable
When a public good is supplied, it is impossible to exclude other individuals from deriving a benefit. For example, once street lighting is made available in an area, all passer-bys can benefit, and no one can be denied access to it.
Non-diminishable
When a pure public good, such as street lighting, is consumed by one individual, the stock available for others does not diminish, as it would in the case of a private good. A pedestrian passing under a street light has no effect on the supply of lighting whatsoever. Because the stock of a public good does not dimish with use, consumers do not need to compete with each other to get access to them.
Non-rejectable
Unlike a private good, consumers cannot reject a pure public good, and are forced to consume it. An individual cannot reject being defended by the armed forces of a country, nor can they reject the benefit of street lighting.
What traits does a pure public good have?
When combined, these three characteristics deter potential suppliers because it would be impossible to charge users at the point of use:
Non-excludable
Non-diminishing/non-rival
Non-rejectable
Free Rider Problem I
No one pays because the first person to pay for supply creates a free supply for everyone else. No one can be excluded from the market and prevented from consuming. Suppliers are not able to generate any revenue/profit. A necessary condition for a market is absent: profit incentive. With no incentive, entry into the market is deterred, resulting in a missing market.
Not only can consumers of a common-property goods benefit without payment, but consumption by one imposes an opportunity cost on others. This will lead to overconsumption and even possibly exhaustion/destruction of the common-property good. If too many people start to free ride, a system or service will eventually not have enough resources to operate.
Free Rider Problem II
The free rider problem is the burden on a shared resource that is created by its use or overuse by people who aren’t paying their fair share for it or aren’t paying anything at all. Their failure to contribute makes the resource economically infeasible to produce.
Remedies to pure public goods
If we assume there is a limit to the formation and completion of markets, and a high probability that some markets might not exist at all, policy makers need to consider how demand can be satisfied. One of the roles of the government is to allocate scarce resources to satisfy demand for public goods.
Remedies to Public Goods
If voluntary precision of public goods is insufficient, then another possible solution is making their provision involuntary. Government provision generally seeks to respond to the free-rider problem within its national boundaries, which generally gives citizens assurances that other individuals will not be free-riding.
One frequently proposed solution is to impose taxation to fund the production of public goods (does not solve the theoretical problem good government is itself a public good). Thus, it is difficult to ensure the government has an incentive to provide the optimum amount even if it were possible for the government to determine precisely what amount would be optimal.
Remedies to Public Goods
- A government can take complete control over the initial planning, funding and operation of public goods. They can impose taxes to pay for these services, rather than try to charge consumers directly.
- With transport services, government can fund the building of the infrastructure, and contract-out the running and maintenance of the service to private firms, as with bridges, tunnels, motorways and airports.
Incomplete Markets
An incomplete market is one where some of the necessary conditions for market formation exist, but not all of them. Entrepreneurs may enter the market because profits are possible. However, the firms that do start-up will only satisfy a small proportion of potential demand. In these incomplete markets, total supply is insufficient to meet the needs of consumers.
