Public Goods

What are Public Goods?

Public goods or pure public goods are goods that bring significant social benefits to society but cannot be provided by the free market. They are market failure, which means the government needs to intervene in the market to ensure they are provided because they bring significant social benefits we also consider them to be merit goods.

To understand Public Goods, we first need to understand two things about a good:

Excludability - Can a user be excluded from the consumption of a good?
Rivalrous - Does the consumption by one person affect the consumption by another?

When we looked at free markets, the private goods being produced and consumed in these markets can be considered both excludable (only those willing and able to consume at the market price could do so) and rivalrous (if I consumed a good, that will directly impact your ability to consume the same product.)

Pure Public Goods on the other hand are:

Non Excludable - As the are provided for free, no one person can be excluded from the consumption of that good. If I build a footpath next to the road, it is very difficult for me to exclude people from using it.

Non Rivalrous - The consumption of the good does not directly affect another persons ability to consume. If someone walks on the footpath I have built, it does not mean someone else can't use the product.

Street lights are an example of a Pure Public Good. Governments provide street lighting because of the additional social benefits they provide to a society. They reduce road accidents, and can also deter crime. As they are provided by the government, anyone is free to benefit from the street lights. We can therefore say they are Non Excludable as no one is able to be excluded from using them. Similarly, they are Non Rivalrous as the benefits gained by one person from using the street light do not directly impact another persons ability to use it.

The Free Rider Problem and Public Goods - Why are public goods a market failure...

The characteristic of Non Excludable presents a big problem for a private market in providing public goods. Due to the lack of a price mechanism and the difficulties excluding consumers can't be excluded from consuming a public good. Therefore, no profit maximising firm would be willing to provide a good or service that it could not charge consumers to use, as is the case in the market for private goods and services. If a private firm place street lights on a road, it would be near impossible for the firm to stop people benefiting from the street lights if they don't pay for it.

In economics, we call this situation the free rider problem. It is because of this reason, private firms fail to provide these types of goods and therefore the "Market Fails" to allocate resources to maximise societies well being. In a free market, there is an underprovision of these goods. Thus, it falls to governments to directly provide these goods directly instead.

Quasi Public Goods (Semi Public Goods)

Quasi Public Goods are an example of goods which are Excludable but Non Rivalrous. Consumers can be excluded usually by the introduction of a price for the good. Some examples may include:

A public park with an entrance fee
A toll road
Some forms of Public Transport

All of these goods bring positive externalities to society when consumed and are therefore sometimes provided by governments, however usually for a fee.

Direct Provision of Public Goods by Governments

Where governments see the provision of a public good as crucial to society they will set up and provide the public good. Most countries have public good that are set up and provided by the state. Public good such as national defence, flood defences and street lighting are directly provided by the government and funded through taxation. The current level spending of annual defence by the US government is $934 billion. This is almost 4 percent of its GDP. Its spends 3 times as much as China which is the next biggest spender on defence. The decision by the US to spend as money as it does on defence is heavily influenced by political factors. It does, however, come at a significant opportunity cost in terms of other items of expenditure the US government could spend its money on such as health and education.

Advantages of State Provision of Public Goods

Government provision of public goods is the only way they can be produced. Remember the free market will not generate a price that can support the production of a public good.
Governments are more likely to provide quasi-public goods near the socially efficient output.
When the government is providing a public good it is more likely to make decisions in the public interest compared to private sector businesses that aim to make a profit. This could be important in the provision of quasi public goods such a parks. ,
Governments can provide public goods at zero price so they are available to low-income households.

Disadvantages of State Provision of Public Goods

The cost of providing state funded and managed public goods is extremely high and there is a significant opportunity cost to the government in terms of other areas of expenditure.
Some people question the efficiency of state-run organisations that provide public goods.
State managed and organised public goods can be influenced by political decision making which may not be in the best interests of society. For example, expenditure on defence can influenced by political rather than welfare factors.
It is impossible to accurately know the level of provision of the public good that is socially efficient.

Private Sector Provision of Public Goods

It is possible for governments to set up and pay for the provision of public goods that can then be managed by private sector organisations. This is particularly the case with quasi-public goods like toll roads. In this example the government pays firms to run the tolls on their behalf.

Advantages of Private Sector Provision of Public Goods

This approach has the benefit of making sure the public good is provided, but the operational management maybe more efficient than government managed provision.
Private sector provision means political decision making is less likely to take place in the management of the public good.

Disadvantages of Private Sector Provision of Public Goods

The cost of setting up the provision of the public good still needs to be paid for by the government which will come with and opportunity cost.
A private sector firm may provide the service putting profit ahead of welfare. Private sector operated prisons are some times criticised for cost cutting management practices.
It is impossible to know the level of provision of a private sector managed public good to achieve the socially efficient output.

Page updated

Google Sites

Report abuse