public-goods

Public Goods

• A public good is substantially different to a private good

• Private goods are goods which firms are able to provide to generate profits. They can generate profits as these goods are excludable and rivalrous

  • The firm is able to exclude certain customers from purchasing their goods through use of the price mechanism. If customers cannot afford to buy them, then they are excluded

  • Customers can also compete for these goods which are limited in supply and this rivalry helps to generate profits for firms

• Public goods are goods that are beneficial to society but will not be provided by private firms due to the principles of non-excludability and non-rivalry 

  • Non-excludability refers to the inability of private firms to exclude certain customers from using their products. In effect, the price mechanism cannot be used to exclude customers, e.g. street lighting

  • Non-rivalry refers to the inability of the product to be used up, so there is no competitive rivalry in consumption to drive up prices and generate profits for firms

  • Therefore, governments will often provide these beneficial goods themselves, and so they are called public goods

• If firms decided to provide these goods anyway, it would give rise to what is called the ‘free rider’ problem

  • This is a situation where customers realise that they can still access the goods, even without paying for them

  • If they are paying, they stop and continue to enjoy the benefits. They are ‘free-riding’ on the backs of other paying customers

  • Over time, any customers who are paying for the goods will stop

  • At some point, firms will cease to provide these goods and they will become under-provided in society