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Public Goods and Private Goods

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Public Goods and Private Goods Public goods provide an example of market failure resulting from missing markets. To understand this, it is helpful first to discuss what is meant by a private good or service. Private Goods A private good or service has three main characteristics: 1. Excludability: A ticket to the theatre or a meal in a restaurant or pay-per-view sporting events are examples of 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. 2. Rivalry: If you order and enjoy a pizza from Pizza Hut, that pizza is no longer available to someone else. Likewise driving your 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 producing and supplying the good or service. 3. Rejectable: If you don't like the Private and Public Goods – a question of exclusion soup on the school menu, you can use your money to buy Le Shuttle is a private good – the service is excludable, rival something else! You can choose in consumption and rejectable. But not all providers of public not to travel on Virgin Rail and goods make a profit. go instead by coach, or you can choose not to buy a season ticket for your local soccer club and instead use the money to finance a subscription to a local fitness club. All private goods and services can be rejected by the final consumer if their tastes and preferences of if their budget changes. Characteristics of Public Goods The characteristics of pure public goods are the opposite of private goods: 1. Non-excludability: The benefits derived from pure public goods cannot be confined solely to those who have paid for it. Non-payers can enjoy the benefits of consumption at no financial cost – economists call this the ‘free-rider’ problem - and it means that people have a temptation to consume without paying! 2. Non-rival consumption: Consumption of a public good by one person does not reduce the availability of a good to everyone else – the marginal cost of supplying a public good to an extra person is basically zero. 3. Non-rejectable: The collective supply of a public good for all means that it cannot be rejected by people, a good example is a nuclear defence system. There are relatively few examples of pure public goods. Examples include flood control systems, some of the broadcasting services provided by the BBC, public water supplies, street lighting for roads and motorways, lighthouse protection for ships and also national defence services. Policing – a public good? Is policing an example of a public good? The general protection that the police services provide in deterring crime and investigating criminal acts serves as a public good. But resources used up in providing policing means that fewer resources are available elsewhere. Private protection services such as private security guards, privately bought security systems and detectives are private goods because the service is excludable and rival in consumption and people and businesses are often prepared to pay a high price. Public goods and market failure 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 is appropriate for society. To do this, it must estimate the social benefits from making public goods available. Quasi-Public Goods A quasi-public good is a near-public good i.e. it has many but not all the characteristics of a public good. Quasi public goods are: 1. Semi-non-rival: up to a point, extra consumers using a park, beach or road do not reduce the space available for others. Eventually beaches become crowded as do parks and other leisure facilities. 2. Semi-non-excludable: it is possible but often difficult or expensive to exclude non- paying consumers. E.g. fencing a park or beach and charging an entrance fee; building toll booths to charge for road usage on congested routes The air waves – a public good or quasi public good? The airwaves used by mobile phone companies, radio stations and television companies are essentially owned by the government. Do they count as a pure public good? One person’s use of the airwaves rarely limits how other people can benefit from utilising them. But when demand for mobile phone services is high at peak times, the airwaves become crowded and access to the networks can become slow. The government also controls the issue of licences needed to operate mobile phone services using the airwaves in the UK. In 2000, they auctioned off five licences for 3rd generation mobile phone services and raised £22 billion in doing so. The government was using the auction to ration the airwaves through a licence system. Although the government has monopoly control in the sense that it controls the issue of licences, it did not set the market price. This was determined by the auction, and the fact that at the end of a bidding war, the major mobile phone companies were prepared to pay such a high price for a licence is evidence of the private benefit (i.e. the anticipated future profit) that the companies expected to make from selling 3rd generation contracts to customers. Typology of public goods Public Goods, Quasi Public Goods and Private Goods Totally non-rival in consumption National Encrypted Analogue defence digital broadcasting broadcasting Street lighting Fire Service Forth Road Bridge Education and Health Mass MMR vaccination Totally rival in consumption Totally Totally non- excludable excludable The case for government intervention in the case of public goods • The non-rival nature of consumption provides a strong case for the government rather than the market to provide and pay for public goods. • Many public goods are provided more or less free at the point of use and then paid for out of general taxation or another general form of charge such as a licence fee. • State provision may help to prevent the under-provision and under-consumption of public goods so that social welfare is improved. • If the government provides public goods they may be able to do so more efficiently because of economies of scale. Public Bads A public bad is the opposite of a public good – it provides disutility or dis-satisfaction to people when consumed and therefore reduces our economic welfare. A good example to look at would be the disposal of household and commercial waste. People are normally prepared to pay a price for their household waste to be collected and disposed of in a safe and non- polluting way. But if waste was changed for according to how much had been generated, then some people would find an incentive to dump their waste on other people’s property and thereby avoid direct charges. Suggestions for further reading on public and private goods Companies win contracts for new aircraft carriers (BBC news, July 2008) One home in six at risk - flood defences as a public good (Tutor2u Economics Blog, June 2009) Fishing for a problem for the tragedy of the commons (Tutor2u Economics Blog, April 2009) The cost of streetlighting (Tutor2u Economics Blog, December 2008) Web slows after Jackson’s death (BBC news, June 2009) .
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