Public And Private Goods

Public Goods

Introduction

Definition : good that is both ”Non-excludable” and “Non-rivalrous”

Non-excludability : Benefits cannot be confined to only those who have actually paid for it

Non-rivalrous : Consumption by one person does not reduce the availability of a good to everyone else

Quasi Public Goods

Quasi public goods : near-public good 

They are : Semi-non-rival Semi-non-excludable

The Free Rider Problem

“Each citizen who can enjoy the benefit of a public good has an incentive to try to lay the whole burden of provision on others, whenever the exclusion of non-payers is very costly or impossible.”

If too many consumers decide to 'free-ride', private costs exceed private benefits and the incentive to provide the good or service through the market disappears. The market thus fails to provide a good or service for which there is a need.

Solution to Free Rider problem

•Internet crowdfunding

Coasian solution

•Taxation to fund the production of public goods

Government provision

•Subsidize production of a public good in the private sector

•Joint-product model

Subsidies and joint products

Solution to Free Rider problem•A

group of individuals who benefit more from the public good than it costs them to produce it

Privileged group

•Eliminate the profit incentive for free riding by buying out all the potential free riders

Merging free riders

•Exclusion mechanisms which turn public goods into club goods

•Eg : Copyright and patent laws

Introducing an exclusion

mechanism (club goods)

Altruistic Solution to the Free Rider Problem•Mor

e responsible citizens

•Social behavior is contagious: people unconsciously adapt their behavior to that of their peers

Social Norms

•Peer-to-peer punishment

Social sanctions

•Red Cross, Wikipedia, public radio

•Philanthropy

Voluntary organizations

•Encouraging deep-seated personal beliefs

Religions and Ideologies

PRIVATE GOODS

Introduction

Definition : an item that yields positive benefits to people that is excludable and rivalrous

If there is a competition between individuals to obtain the good and if consuming the good prevents someone else from consuming it, a good is considered to be a private good

Examples : food, buying a car, cell phones, getting a haircut, etc.

Characteristics Of Private Goods

Excludability: Consumers can be easily prevented from consuming these products by the seller

Rivalry: One person’s use or consumption of the products reduces the amount of the product left for another individual to consume and benefit from.

Rejectability: All private goods and services can be rejected by the final consumer should their tastes and preferences change.

Pricing of Private Goods

Follow the Law of Demand – the price increases when the demand is high but the supply is low

Issues with Private Goods

In practice, private goods exist along a continuum of excludability and rivalry and sometimes may exhibit only one of these characteristics. The absence of excludability and rivalry introduces market failures that ensure that some goods and services cannot be efficiently provided by the markets.

Inefficiency in the production and consumption of private goods can also arise when there are spill over effects or externalities in the production

Fairness and justice issues

Difference Between Public And Private Goods

Features Public Goods Private Goods

Payment Time and the method of

payment are uncertain. In

most cases, payment is not

done at all.

Payment is always done prior

to the receipt of goods.

Consumption Anyone and everyone are

free to consume the product.

The good or service are said

to be non-rival in

consumption.

When the good or service is

consumed by one person or

group, it becomes unavailable

to others.

Difference Between Public And Private Goods

Benefits No one is excluded from the

benefits. The benefits are

“collective benefits” and can be

used by the entire society as a

whole.

Benefits are limited to only the

individual who consumes the good

or service. He alone will be

benefitted by the consumption of

the product.

Demand Consumers cannot pick and choose

the product or service they want.

The quantities for the product or

service are fixed.

Demand for the product or service

is always summed vertically.

Consumers are free to pick and

choose the goods and services as

they wish.

Quantities demanded for each good

and service is totalled to make up

the total market demand.

Demand for the product or service is

always summed horizontally