The Distinction Between Private & Public Goods
- A public good is substantially different to a private good
- Private goods are goods that firms are able to provide to generate profits. They can generate profits as these goods are rival and excludable
- The firm is able to exclude certain customers from purchasing their goods through the price mechanism. If customers cannot afford to buy them, then they are excluded
- Rival goods can only be consumed by a single user. Customers can 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 streetlights and lighthouses. They are not be provided by private firms due to the principles of non-excludable and non-rivalrous
- Non-excludable means that anyone can access these resources without having to pay for them. This usually occurs because no one owns the resource (no private ownership), e.g street lighting
- Non-rivalrous is when one person consuming it does not prevent another person from consuming it. They are finite in supply
- If firms decided to provide these goods anyway, it would give rise to 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, resulting in a missing market and a complete market failure
- Governments usually provide public goods but the quantity provided may be less than the socially optimal level
Exam Tip
Ensure that you know the difference between public goods and merit goods. The key idea is that private firms will not provide public goods, so under-provision (or no provision) occurs in society.
On the other hand, private firms will provide some merit goods as they are able to make a profit on them. However, due to the profit incentive and high prices that firms charge, not all members of society will be able to afford these goods. So merit goods are also under-provided, but there is some provision of them
Worked example
Which one of the following distinguishes a private good from a pure public good?
- A private good can only be provided by private firms
- Anyone can access private goods without having to pay for them
- Consumption of a private good creates positive externalities for other consumers
- One person’s consumption of a private good reduces the amount available for other consumers
Answer
D. One person’s consumption of a private good reduces the amount available for other consumers
Private goods are rivalrous goods that can only be consumed by a single user. Customers can compete for these goods, which are limited in supply, and this rivalry helps to generate profits for firms. A pure public good is non-rivalrous, as one person consuming it does not prevent another person from consuming it