public goods
The government spends billions of pounds each year on public goods. To understand the nature of these goods more clearly, and why the government is left to provide these for people throughout the economy, we must consider the characteristics of private goods
Private Goods
A private good has three main characteristics:
Excludability:
Consumers can be excluded from consuming the product if they are not willing to pay for it (for example - a ticket to the theatre or a meal in a restaurant)
Rivalry:
One person's consumption of a product reduces the amount available for other people to consume - because scarce economic resources are used up in producing and supplying the good or service
Rejectability:
Private goods and services are rejectable - if you don't like the look of the soup on the college menu, you can reject the chance to consume it and use your money to buy something else.
Characteristics of public goods
The characteristics of pure public goods are the opposite of private goods.
They are services which are clearly in demand, but which must be provided
collectively by the Government for two main reasons:
Non-excludability - goods cannot be confined to those who have paid for it. In this sense, non-payers can take a free ride and enjoy the benefits of consumption
Non-rivalry in consumption - consumption
by one person does not reduce the availability of a good to others.
Examples
of public goods
Examples of public goods include flood control systems, street lighting and
national defence. Public goods (in fact most of them are services!) are not
normally provided by the private sector in an economy. Partly this is because
of the free-ride problem.
The Free Rider Problem
The "free rider" principle says that you cannot charge an individual a price for the provision of a non-excludable good because somebody else would gain the benefit from consumption without paying anything.
Consider the case of the provision of traffic wardens and safety signs on roads. One person's benefit from these services is not unique - other motorists benefit from the service as well - but they cannot be stopped and asked to pay for the benefits they derive.
Public goods
and market failure
Why is there market failure with public goods? The main reason is that private
sector producers will not supply public goods to people because they cannot
be sure of making an economic profit. This is due to the characteristics of
public goods outlined earlier. Consumers can take a free ride without having
to pay for the good or service.
The obvious solution is that these goods are
provided collectively by the government, and then financed through taxation
of individual households and businesses.
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