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Study Notes

1.3.3 Public Goods (Edexcel)

Level:
A-Level
Board:
Edexcel

Last updated 19 Sept 2023

This study note for Edexcel covers Public Goods.

Here are structured study notes for A-level economics on the topics of the distinction between public and private goods using the concepts of non-rivalry and non-excludability, and why public goods may not be provided by the private sector, including the free rider problem, with real-world examples where applicable:

A) Distinction Between Public and Private Goods Using Non-Rivalry and Non-Excludability

1. Private Goods

  • Private goods are characterized by two key features: rivalry and excludability.
  • Rivalry: Consumption by one individual reduces the availability of the good for others.
  • Excludability: Producers or sellers can prevent individuals from consuming the good if they do not pay for it.

Example of a Private Good: A sandwich is a private good. If one person eats the sandwich, it is no longer available for others, and it can be easily withheld from those who do not pay for it.

2. Public Goods

  • Public goods are characterized by two key features: non-rivalry and non-excludability.
  • Non-Rivalry: Consumption by one individual does not reduce the availability of the good for others; it is "non-depletable."
  • Non-Excludability: It is difficult or costly to prevent individuals from benefiting from the good, regardless of whether they pay for it.

Example of a Public Good: National defense is a classic example of a public good. The protection provided by the military benefits all citizens, and it is challenging to exclude non-payers from this benefit.

B) Why Public Goods May Not Be Provided by the Private Sector: The Free Rider Problem

1. The Free Rider Problem

  • The free rider problem occurs when individuals can benefit from a public good without having to pay for it.
  • Since it is difficult to exclude non-payers, individuals may choose not to pay for the good, assuming that others will pay and they can still enjoy the benefits.
  • This leads to underfunding or underproduction of public goods in the private market.

Example of the Free Rider Problem: Consider a fireworks display in a park. If the cost of the display is borne by one person or a few people, others can enjoy the show without contributing financially. Many individuals may decide not to contribute, assuming that the display will proceed regardless, resulting in insufficient funding.

2. The Role of Government

  • Governments often intervene to provide public goods because they are unlikely to be adequately supplied by the private sector.
  • Governments can finance public goods through taxation, ensuring that everyone pays their fair share.

Example of Government Provision: Public education is a public good funded by governments. It benefits all members of society, and taxes are used to finance it, overcoming the free rider problem.

3. Quasi-Public Goods

  • Some goods exhibit characteristics of both public and private goods. These are referred to as quasi-public goods.
  • They may have elements of non-rivalry or non-excludability but not to the same extent as pure public goods.

Example of a Quasi-Public Good: Toll roads are quasi-public goods. While they are excludable (you must pay to use them), they are non-rivalrous because one person's use does not significantly affect another's ability to use the road.

Understanding the distinction between public and private goods, along with the free rider problem, is essential for analyzing the provision of public goods in the economy. It highlights the challenges that arise when individuals have the incentive to consume public goods without contributing, leading to market failure and the need for government intervention.

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