Public Goods
Another market failure
Definition: 'Public goods result in market failure. They exhibit non-excludability and non-rivalry which means the free market does not produce them.'
Pure public goods: goods that are both non-excludable and non-rival.
Quasi public goods: goods that have only one of the characteristics.
Firstly, what is non-excludability and non-rivalry?
Non-excludability means that the firm cannot exclude the benefits of the produce to the person who pays for it. Take for example, the light produced from a street lamp. If the firm were to charge you for lighting the streets, then they would not be able to exclude passers by who also benefit from the street lamp for free. So it only takes one person to pay for it and others can enjoy the product. This is called the free rider problem.
Non-rivalry means that the good has an abundance of supply and relatively low demand. This means that when one person consumes it, it does not restrict the amount available for anybody else. An example is radiowaves. Just because I listen to BBC 1XTRA, it doesn't mean that you can't too!
Why do public goods result in a market failure?
Firstly, think that you own a firm. Your objective is profit maximisation. If your product is non-excludable and non-rival how can you make a profit? Non-excludability will mean that there are free riders who benefit from your product without paying. Non-rivarly will mean that people aren't exactly fighting to benefit from your product - so you're not going to be able to charge a high price for it. A firm ideally wants their product to be excludable and rival so they can charge a high price from it, only to those who benefit, and therefore make a huge profit.
Because of non-rivalry and non-excludability, public goods will not be provided by the free market because firms cannot profit from them. This leads to the missing market problem. We call this a total/complete market failure, because the market doesn't supply the good at all. There are benefits of public goods but the free market won't allocate those resources to increase social welfare. So the market fails to do its job of maximising social welfare.
What are some examples of public goods?
1) Radiowaves - typically non-excludable and non-rival. [there could be ways of making it non-excludable but it is hard for firms to enforce it]
2) Street lamps - typically non-excludable and non-rival.
3) National defence - typically non-excludable and non-rival. [You might not pay or contribute to national defence but you benefit from it. National defence is also consumed collectively so you're not in rivalry with other people.]
4) Private parks - typically excludable but non-rival. There could be people excluding you from entering a park if you don't pay. But your usage of the park doesn't typically reduce the amount available to others.]
5) Satellite TV - typically excludable but non-rival
6) Fish Stocks - typically non-excludable but rival. Overfishing causes less available is a global problem.
7) Non-renewable energy e.g. coal - typically non-excludable but again this is rival because it is in limited supply and there are lots of people fighting for it. When you use it, somebody else might go without.
[Remember that points 1 to 3 are 'pure public goods.' Points 4 to 7 are 'quasi public goods.'
What have we learned?
We've learned about public goods and how they can result in a market failure and no resource allocation [complete market failure]
The difference between pure and quasi public goods
Different examples of public goods - determining whether or not they are pure or quasi public goods
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