Public Goods (DP IB Economics)

Characteristics of Public Goods

• A public good is substantially different to a private good
  

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

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

  • Customers can also 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. roads, parks, lighthouses, national defence) but which will not be provided by private firms due to the principles of non-excludability and non-rivalry 

  • Non-excludability refers to the inability of private firms to exclude certain customers from using their products. In effect, the price mechanism cannot be used to exclude customers e.g. street lighting

  • Non-rivalry refers to the inability of the product to be used up, so there is no competitive rivalry in consumption to drive up prices and generate profits for firms

  • Therefore, governments will often provide these beneficial goods themselves, and so they are called public goods
    
    

• If firms decided to provide these goods anyway, it would give rise to what is called 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

Government Intervention in Response to Public Goods

• Governments have three possible responses to the under-provision of public goods

1. Do nothing:  no provision is offered

2. Provide the good/service themselves e.g. libraries, parks

3. Contract out: accept bids from private companies who wish to provide the good/service, choose the lowest priced bid and pay the company to provide the good/service 

• Both option 2 and 3 require the provision to be paid for by governments

  • There is an opportunity cost to any funding decision