Public, private and quasi public goods

• What are private goods?

  • 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
• What are public goods?

  • 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 
• What is the free-rider problem?

  • 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
• What are quasi public goods?

  • Quasi-public goods are non-pure public goods that have characteristics of public goods and private goods
  • They are partially provided by the free market and have elements of non-excludability or non-rivalry
• How are roads quasi public goods?

  • Once provided, most people can make use of roads, but roads can be semi-non-excludable through the use of tolls
  • At high levels of demand, consumption by one individual can reduce the benefit to others by limiting the availability of roads due to increased congestion. This makes roads semi-non-rival
  • Public goods are usually funded by governments. Quasi-public goods may be funded by a combination of government revenues and user fees
• Summarise the tragedy of the commons.

  The tragedy of the commons describes a situation when individuals with access to a public, unregulated resource (a common), act in self-interest over the well-being of society
• How can public goods lead to tragedy of the commons?

  • Common pool resources are non-excludable, similar to public goods
  • Unlike public goods, common-pool resources are rivalrous in consumption. Individuals can exploit shared resources until demand exceeds supply, resulting in overconsumption
  • If resources are used in an unsustainable way, this could ultimately lead to the damage or depletion of a shared resource
  • e.g overfishing