Public Goods Flashcards
What are the two main characteristics of public goods?
- Non excludability
- Non rivalry
- Non rejectable
What is non excludability?
People cannot be stopped from consuming the good even if they haven’t paid for it.
What is non rivalry?
One person benefiting from the good doesn’t stop others also benefiting.
• There is zero marginal cost, no additional cost to extending the good to one more person
What is the marginal cost of public goods?
Zero, there is no additional cost to extending the good to one more person.
What are the characteristics of private goods?
- Excludable ( can prevent someone from consuming them )
- Rejectable ( people have a choice as to whether to consume private goods )
- Exhibit Rivalry
What are quasi public goods?
Exhibits the characteristics of a public good, but not fully.
What is the free rider problem?
Once a public good is provided its impossible to stop someone from benefiting from it, even if they haven’t paid towards it.
Why does the price mechanism does not work with free riders?
- Consumers won’t choose to pay for a a public good that they can get for free because other consumers have paid for it.
- If everyone decides to wait and see who will provide and pay for a public good, then it won’t be provided.
Why is it difficult to set a price for public goods?
It’s difficult to work out their value to customers.
How do producers view public goods?
Producers tend to overvalue the benefits of a public good in order to increase the price that they charge.
How do consumers view public goods?
Consumers will undervalue their benefits to try and get a lower price.
What are firms views on public goods?
Due to the free rider problem, and the failure of the price mechanism, firms will be reluctant to provide public goods.
As a result governments will have to intervene to provide the public good.
How do positive externalities relate to public goods?
They’er consumed by those who don’t pay for them, so they are an example of the free rider problem.
Positive externalities are a form of public good.
What causes the free rider problem?
Non excludability of public goods.
What is the tragedy of the commons?
Idea that people acting in their own best interests will overuse a common resource without considering that this will lead to the depletion or degradation of that resource.
