a) Distinction between public and private goods using the concepts of non-rivalry and nonexcludability
Characteristics of a Public Good
Non Rival (diminishable) – consequences of a good or service by one person doesn’t inhibit or reduce another person’s benefit from this good or service
Non excludable – Impossible to prevent an individual benefitting from a good or service if they haven’t contributed towards its provision
Non rejectable – Consumers cannot reject a pure public good – forced to consume it
• E.g. an individual can’t reject being defended by the armed forces of a country, nor can they reject the benefit of street lighting.
When combined, these three characteristics deter potential suppliers because it would be impossible to charge users at the point of use
Examples of public goods
• Lighthouse, Flood Defences • Beach, Free Outdoor Festival • Internet, National Defence • School • Street Light • Watching a Sunday League football match • Academic research • Road
b) Why public goods may not be provided by the private sector: the free rider problem
Market failure – Occurs when under the free market no one would buy a public good and instead they would just wait for someone else to do so, because no one is willing to buy the good, no one is willing to supply the good so we have ‘missing markets’.
Suppliers can’t charge at the point of consumption because of the free-rider problem.
No one would pay because the first person to pay for supply creates a free supply for everyone else. No one can be excluded from the market and prevented from consuming – encouraged to become free-riders.
Because of this, suppliers aren’t able to generate any revenue, or make a profit, so a necessary condition for the formation of a market is absent, namely the absence of a profit incentive. With no incentive, entry into the market is deterred, resulting in a missing market.
