market-failure-public-private-and-quasi-public-goods

The Distinction Between Private & Public Goods

• A public good is substantially different to a private good

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

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

  • Rival goods can only be consumed by a single user. Customers can 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, e.g streetlights and lighthouses. They are not be provided by private firms due to the principles of non-excludable and non-rivalrous

  • Non-excludable means that anyone can access these resources without having to pay for them. This usually occurs because no one owns the resource (no private ownership), e.g street lighting

  • Non-rivalrous is when one person consuming it does not prevent another person from consuming it. They are finite in supply 

• If firms decided to provide these goods anyway, it would give rise to 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, resulting in a missing market and a complete market failure

  • Governments usually provide public goods but the quantity provided may be less than the socially optimal level

Quasi-Public Goods

• Quasi-public goods are non-pure public goods that have characteristics of public goods and private goods

  • They are partially provided by the free market and have elements of non-excludability or non-rivalry

  • Once provided, most people can make use of roads, but roads can be semi-non-excludable through the use of tolls

  • At high levels of demand, consumption by one individual can reduce the benefit to others by limiting the availability of roads due to increased congestion. This makes roads semi-non-rival

  • Public goods are usually funded by governments. Quasi-public goods may be funded by a combination of government revenues and user fees

How Public Goods take on Characteristics of Private Goods

Technological Change & Public Goods

• Technological advancements can influence the characteristics of public goods, making them more excludable and rivalrous

  • It can create cost effective ways to price goods/services and therefore public goods can become quasi-public goods or even private goods

Technological change and excludability

• Technology is often non-rival but excludable

  • E.g Television broadcasting, once considered non-excludable, can now be made excludable through subscription services. It excludes consumers who are not willing to pay

  • This transforms it into a quasi-public or even a private good

Technological change and the free-rider problem

• Technology can be used to minimise the free-rider problem associated with public goods 

  • E.g By implementing technologies like number-plate recognition and tracking on motorways, it reduces free-riding behaviour and tackles payment evasion. It is also more efficient than using traditional tolls, as it reduces traffic congestion as cars can move more freely and do not stop to pay tolls

Public Goods Leading to Tragedy of the Commons

• The tragedy of the commons describes a situation when individuals with access to a public, unregulated resource (a common), act in self-interest over the well-being of society

  • Common pool resources are non-excludable, similar to public goods

  • Unlike public goods, common-pool resources are rivalrous in consumption. Individuals can exploit shared resources until demand exceeds supply, resulting in overconsumption

  • If resources are used in an unsustainable way, this could ultimately lead to the damage or depletion of a shared resource

• E.g The overfishing of oceans. As fishing vessels have an incentive to maximise profits, they attempt to catch as many fish as possible

  • If left unregulated, overfishing can deplete populations of fish to unsustainable levels and result in habitat degradation

• A more detailed discussion of tragedy of commons can be found on this page