Public goods Flashcards
Public goods
- A good that once provided may be difficult to prevent anyone from benefiting from it
- Public goods cause market failure due to the problem of missing markets
Main charteristsics
- Non-excludability
- Non-rival consumption
- Non-rejectable
Non-excludibility
- Benefits derived from pure public goods cannot be confined solely to those who have paid for it.
- Non-players can enjoy the benefits of consumption at no financials cost to themselves - economists call this the ‘free rider’ problem
Non-rival consumption
- Each party’s enjoyment of the good or service does not diminish others enjoyments - in other the words the marginal cost of supplying a public good to an extra person is zero. If a public good is supplied to one person, it is available to all
Non-rejectable
- The collective supply of a pure public good for all means that it cannot be rejected by people, an example is a national nuclear defence system or major flood defence projects
Public goods nature
The nature of public goods is that it is hard to protect property rights
Quasi public good
- A quasi public good is a near-public good. It has some of the characteristics of a public good
- A public good may take one some of the features of a private good
Characteristic of Quasi-public goods
- Semi non rival
- Semi non excludable
Semi non rival
- Up to a point, more consumers using a park, beach or road don not reduce the space available for others But eventually beached become crowded as do parks/ leisure facilities.
- Open-access Wi-Fi networks become crowded
Semi non excludable
- It is possible but difficult or costly to exclude non-paying customers. E.g. fencing a park or beach and charging an entrance fee; or building toll booths on congested road routes
Public goods and market failure
With public goods, private sector markets may fail to supply in part of in whole the optimum quantity of goods
- Pure public goods are not normally provided by the private sector because they would be unable to supply them for a profit
- It is up to the government to decide what output of public goods/ funding of public goods is appropriate for society
- To do this, it must estimate the net social benefits from making public goods available
Free rider problem
- Because public goods are non-excludable it is difficult to charge people for benefitting once a product is available
- The free rider problem leads to under-provision of a good and thus causes market failure
The changing nature of Public goods
Advances in technology re causing a blurring of the distinction between public and private good. For example:
- In some cases, encryption allows suppliers to exclude non-players - although the product remains non-rival
- Technological progress reduces the cost of smart-metering used in road and pricing - this makes roads more private (excludable) good
- The open source/ creative commons movement has made much information public good in nature
Should the government provide public goods?
The state finances many public goods but should it always provide
1. The non-rival nature of consumption provides a strong case for the government rather to provide and pay for public goods
2. Many public goods are provided free at the point of use and the funded by taxation or a charge such as the BBC’s licence fee
3. State provision may help to prevent under-provision and under-consumption of public goods so that social welfare is improved
4. If the government provides public goods they may be able to do so more efficiently because of economies of scale
5. Providing essential public goods help affordability and access to important services for lower income households and therefore helps to address inequalities of income
6. If the government becomes a monopoly provider, there is a danger of a lack of efficiency arising from a lack of competition
7. In some cases the state will fund and the private sector provides public good e.g. public private partnerships
Global public goods
- Global public goods benefit every country, irrespective of which ones provide them
- They have become more important recently
1. Security from war, violence and crime
2. The rule of law, property rights and contract enforcement
3. Eradication of smallpox, Ebola and other diseases
4. Non use/ proliferation of nuclear weapons
5. Agreements/ measures towards protection of the ozone layer
Public bad’s
- A public bad has negative effects (externalities) on people and their communities leading to a significant loss of social welfare
- Examples of public bads
> Spread of infectious diseases such as Ebola
> Unauthorized/ illegal surveillance in the state
> Modern slavery/ human trafficking
> Environmental threats to the global commons
> Gender and other forms of discrimination in the labour market
> Disposal of household and commercial waste
> Web viruses/ denial of service attacks
> High rate of global inequalities of income and wealth
> Endemic corruption within organisations and societies
> Externalities from banking crisis/ financial mismanagement
Key point: Arguments about whether market activity lead to public bads almost inevitably involves making normative statements that carry value judgements
The tragedy of the commons
- The pursuit of individual self interest is often not good for social efficiency leading to the long term depletion of resources
- Consider the example of a stock of common grazing land used by all livestock farmers in a small village
- Each farmer keep adding more livestock to graze on the commons, because the marginal cost of doing so is zero
- But because the commonly own resource is the over used the result is a depletion of the soil, lower productivity and thus a fall in the market value of these resources for all users
- The resource may become irretrievably damaged
- The contribution of each agent is minute, but summed over all agents, thee actions can cause long term damage
Key point: The tragedy of the commons is caused mainly by the lack of property right meaning that a government/ community cannot protect the resources
