ECON1101 - Public Goods

A Public Good is one that is nonrival and non-excludable.

Rivalry

Rivalry is the extent to which consumption of something by one person diminishes the availability of it for others.

Excludability

The extent to which people can be excluded from consuming something.

Four Types of Good

There are four types of goods depending on the combinations of rivalry and excludability.

Rival Non-Rival
Excludable Private Good (cheeseburger) Collective Good (Pay TV)
Non-Excludable Common Good (the ocean) Public Good (free-to-air TV)

Publicly Provided Goods

Goods can be provided publicly or privately, usually determined by policy.

For instance education is publicly provided by the government, but rival and excludable, and ideas are non-rival and non-excludable, but are protected privately by patents.

Why Should The Government Provide Goods Publicly

There are good and bad facets of publicly provided goods. For instance.

  1. The Free Rider Problem; Individuals cannot be stopped from consuming a good once it has been made publicly available, and they hence have no incentive to contribute back to the provision of the good.
  2. The marginal cost of extra consumers is zero; it is hence inefficient to charge for the good

Paying for Public Goods

The problem with public goods is that not everyone benefits equally. If the government provides the good they can do so in three ways;

  • Head Tax; Everyone splits the cost equally
  • Proportional Income Tax; Everyone splits a percentage of the cost.
  • Progressive Income Tax; The percentage of income paid in taxes rises with income (and all goods are just provided and paid off later).

Progressional Income Tax suits the elasticity of demand (>=1 ) of public goods, but creates the problem that the most productive workers are now discouraged from working.

Optimal Quantity of Public Goods

The Market Benefit curve for any public good is a vertical summation of the individual demand curves. (i.e. the overall benefit is the sum of all the individual benefits).

The optimal quantity is then the point at which the Marginal Benefit Curve intersects the Marginal Cost Curve.

Privately Provided Goods

Public goods can be provided privately (rather than by the government),

This can be done through:

  • Donations; private charities, wikipedia, volunteering
  • New technology to exclude non-payers; electronic toll charges for roads, etc
  • Private contracting; private estates, apartment buildings
  • Sale of by-products; e.g. Radio and TV advertising