CHAPTER 11 PUBLIC GOODS
There are many sources of market failure. These sources of market failure are:
1. Divergence between private and social costs or benefits – This includes the case of public goods, merit and demerit goods, as well as externalities.
2. Market Imperfections – This includes the violation of the assumption(s) of the perfectly competitive market, and shows how in each case, market failure can occur. For example, the assumption of many sellers may not hold in reality. In some markets, there are only one or a few sellers. These firms have huge market share, and are considered dominant firms.
The above sources create the problem of inefficiency. In terms of market failure, it includes the problem of inequity as well.
In this chapter, we focus on public goods.
11.1 Public Goods
A pure public good is a good or a service that has the characteristics of both non-excludability & non-rivalry. As such, they will not be provided by the market.
11.1.1 Characteristics of Public Goods
Non-rivalry in consumption i.e. consumption of the good by additional individuals will not prevent others from enjoying the same good, or reduce the quantity consumed by existing consumers.
Non-excludability (Non-exclusion) means that it is impossible or prohibitively expensive to exclude non-payers from using it.
Examples: Lighthouses, National defence, Public (tsunami) warning system, the legal system, street lighting.
The provision of public goods suffers from the “free-rider” problem. A “free-rider” is anyone who receives the benefits from a good or service w/o having to pay for it. Since anyone can have all the benefits provided by a pure public good without paying for it, each individual consumer will not indicate to purchase this good.
In addition, the no-rival characteristic implies that the whole unit of the good is still present despite consumption by previous consumers. Hence, it does not cost a producer anything to supply to one more consumer. In this case, he will not be able to charge a price, other than zero, for the good. Hence, producers will not supply this good.
Hence, despite the fact that a pure public good yields valuable benefits to society, the “free rider” problem means that the market will not provide such a good (aka complete market failure).
[Put it another way, the rational behaviour of consumers to maximise utility (by choosing to free -ride), leads to an inefficient allocation of resources in the context of public goods.]
The above summary suggests that very few goods are public goods. Many are termed semi or impure public goods.
As technology changes, more and more goods can become private goods (excludable and rival). For example, some roads are excludable with the use of
technology. (Eg: electronic road pricing system in S’pore)
11.2 Private Goods
As opposed to public goods, private goods are both excludability & rival in consumption. As such, they will be easily provided by the market, and does not require any government intervention. Good examples are clothing, watches, shoes, bags, spectacles, etc.
Many goods in the world are private goods!
11.3 Policy Options for Public Goods
11.3.1 Direct or Public Provision
There is no choice other than the government to provide public goods such as national defence and flood-control dam as no markets will provide the goods that are jointly consumed by everyone and no one can be excluded from their provision. In other words, the market economy will not provide them because of the free-rider problem.
The government is in the best position to provide public goods since their objective is not to maximise profits, unlike that of the private producers. In their pursuit to maximise social welfare, the government will take into account the full social costs and benefits generated by public goods.
Note that public / direct provision can also be extended to some merit goods E.g. free education and free vaccinations against selected diseases for primary school students.
1. There is a question of the quantity of public goods a government should provide.
2. Secondly, there is an issue of how can a government identify the level of public demand for the provision of public goods.(Eg. law enforcement)
3. There is a concern about the balance in the provision of a mix of merit goods and public goods.
11.3.2 Transformation of Public Goods
Note: over time, as technology advances, it is possible that technology can alter the characteristics of a public good, to make it be possibly excludable, or possibly or rival, or even both.
For eg, in the case of public roads (or even a quasi-public good), the advancement of technology, notably the advent of electronic road pricing (ERP) system, has turn roads into a private good, both excludable and rival.
Hence, technology can make the provision of a public good by markets a possibility.
In other cases, the market merely wants more of a public good but it is under provided by the government. An instance is that of policing services. Private companies such as Cisco, Ethos, etc, provide private security for individuals and companies, usually consumers with a large private wealth, or companies with very lucrative propriety information, technologies, copyrights, patents, etc.
They have the impression that the public police force is not hard for them, meaning that such public policing services is somewhat rival in consumption. Hence, they prefer to have their own security services for their properties, wealth, valuables, etc.
11.4 Special Cases
All the goods and services in the world can be classified into the following 4 types:
By now, you would be able to recognise national defense and watches as public and private goods respectively. How about the remaining two empty cells? (More of such quasi or semi, or impure public goods in our LIVE online JC Econs group tuition lessons.)
11.5 Sample Short Answer Questions
- Explain the characteristics of a public good.
- Explain the term public good, and decide whether public toilets are examples of a public good.
- It is widely agreed among economists that consumers are likely to pay for museum tours than to pay for national defence protection. Discuss this assertion.
The above questions require your knowledge of public goods , plus strong examination skills & techniques, especially recognising the ned to apply the latent elasticity concepts. More of such assessment skills in our Econs tuition class.
Prior Chapter: Market Efficiency | Next Chapter: Merit & Demerit Goods