Public and Private Goods
Private good: a good that is both rival and excludable, so one person's use uses it up and non-payers can be shut out.
Public good: a good that is both non-rival and non-excludable, which the free market fails to provide.
Non-rivalry: one person's consumption does not reduce the amount available to others.
Non-excludability: once provided, no one can be prevented from consuming the good, even if they do not pay.
Quasi-public good: a good that is only partly non-rival or non-excludable, sitting between the two pure cases, such as a road or a beach.
- A private good works in a market because it is rival and excludable, so a firm can charge a price and withhold the good from non-payers.
- A public good has neither feature, which breaks the pricing mechanism the market relies on.
- Non-rivalry means the good serves extra users at no extra cost, and non-excludability means no one can be made to pay, so no market price can form.
- National defence, street lighting, flood defences and a lighthouse are pure public goods (non-rival and non-excludable): they serve everyone at once and non-payers cannot be shut out.
- A road or a beach is a quasi-public good, non-rival until it becomes crowded and only partly excludable.
- By contrast a sandwich or a bus seat is a private good (rival and excludable), which the market supplies without difficulty.
The Free-Rider Problem
Free rider: someone who consumes a good without paying for it, relying on others to fund it.
Free-rider problem: when non-excludability lets everyone consume without paying, so too few pay voluntarily and the good is not supplied.
Missing market: a market that does not exist at all because firms cannot profitably supply the good.
- Because non-payers cannot be excluded, each person can free-ride by consuming the good without paying for it.
- Since everyone has the same incentive, few pay voluntarily, so firms cannot earn the revenue to cover their costs.
- Profit-seeking firms therefore do not supply the good, leaving a missing market and complete market failure.
- Think of a village fireworks display on the common that anyone can watch.
- Each resident hopes their neighbours will pay, so they can enjoy it for free.
- If everyone waits for others to pay, no one funds it and the display never happens.
Government Provision
- This is why pure public goods are usually funded by the government through general taxation.
- Technology such as road tolls or digital paywalls can make some goods excludable, so classification is not fixed and private provision can become possible.
- Test a good against both non-rivalry and non-excludability before labelling it.
- Link non-excludability directly to the free-rider problem and the missing market.
- Do not assume any government-provided good is a public good.
- The label depends on the good's technical features, not on who happens to supply it.
- What does non-rivalry mean?
- What does non-excludability mean?
- How does a private good differ from a public good?
- What is the free-rider problem?
- Why will private firms not supply a pure public good?
