1.8.3 Public Goods, Private Goods and Quasi-Public Goods

Characteristics of Public Goods

Public goods possess two defining characteristics that prevent their provision by the free market.

Non-excludability: it is impossible or extremely costly to prevent non-payers from consuming the good once it is provided.

This means you cannot easily stop someone benefiting from goods such as street lighting or national defence.

Non-rivalry: one person's consumption does not reduce the amount available for others.

The marginal cost of supplying an additional user is zero, for example when another person watches a firework display.

Examples of public goods include national defence, street lighting, lighthouses, public parks, and basic scientific research.

The Free Market Problem and the Free Rider Issue

Because public goods are non-excludable, firms cannot use the price mechanism to charge users.

This creates the free rider problem, where individuals have no incentive to pay because they can benefit from the good without contributing.

They may assume that someone else will pay while they still receive the benefit.

Consequence: if everyone behaves as a free rider, no one pays.

Private firms therefore have no profit incentive to supply public goods, leading to their complete under-provision or non-provision, which is a clear market failure.

Government Provision

Because of this market failure, public goods are typically provided by the government and financed through taxation.

This ensures that society benefits from goods that are socially desirable but unprofitable for the private sector to provide.

Quasi-Public Goods

Private Goods have the characteristics of being both excludable and rivalrous.

Certain public goods can inherit one of these characteristics under specific conditions, making them quasi-public goods.

Quasi-public goods: goods that are either:

• Non-excludable but rivalrous
• Excludable but non-rivalrous

Examples of Quasi-Public Goods

• Roads: at low levels of demand, roads are non-rivalrous and non-excludable. However, at high levels of demand, they become rivalrous due to congestion.
• Internet: at low levels of demand, the internet is non-rivalrous and non-excludable. However, at high levels of demand, it becomes rivalrous due to bandwidth limitations.
• Television: standard television is non-rivalrous and non-excludable. However, subscription-based television is excludable but non-rivalrous.

The Significance of Technological Change: technological advancements can transform quasi-public goods into either private goods or pure public goods by altering their excludability or rivalry characteristics.

Examples include technological advancements such as streaming services, which have made television excludable through subscription models, and the development of number plate recognition technology, which has made roads excludable through congestion charging.

The Tragedy of the Commons

Common pool resources: natural resources that are non-excludable but rivalrous, such as fish in the ocean or grazing land.

Because they are rivalrous, overuse can lead to depletion or degradation of the resource, resulting in a market failure known as the tragedy of the commons.

This occurs when individuals act in their own self-interest and overuse a common resource, leading to its depletion and negative consequences for society as a whole.

Example: overfishing in the ocean can lead to the depletion of fish stocks, which can have negative impacts on the environment and the livelihoods of those who depend on fishing.

Solution: governments can regulate the use of common pool resources through measures such as quotas, permits, and taxes to ensure sustainable use and prevent overexploitation.