PUBLIC GOODS

Sources:
Managerial Economics by Edwin Mansfield and Economics by Paul
Wonnacott/Ronald Wonacott
Public goods in its broad definition
is

ANYTHING THE GOVERNMENT

PROVIDES
A public good provides benefits that are
available to everyone. No one can be
excluded from enjoying this good,
regardless of who pays for it.

A major hallmark in public good is that it

can be consumed by one person without
diminishing the amount that other people
consume of it.
 CHARACTERISTICS OF A
PUBLIC GOOD:
Non-exclusion:
The inability of a seller to prevent people from
consuming a good if they do not pay for it.

Non-rivalry:
The characteristic that if one person consumes a
good, another persons pleasure is not diminished,
nor is another person prevented from consuming it.
 Example of a public good:

Lighthouse
- Once it is built, no sailor can be
excluded from using its services. All
sailors are protected from the rocks
whether or not they helped to pay
for it.
Other Examples of Public Goods:

National defense
Public fireworks display
Flood-control dam
Roads and highways
Information goods
 PUBLIC GOODS VS. PRIVATE GOODS
Public Good No ability to exclude and no rivalry for
benefits.
Private Good Clear ability to exclude and rivalry for
benefits.

Rival? Yes Rival? No

Excludable? Private Goods Excludable? Public Goods

Yes
Ice cream cones No Tornado Siren
Clothing National defense
Food and Drinks Air traffic control
 THE FREE-RIDER PROBLEM
A free-rider is a person who receives the benefit of a
good but avoids paying for it.

Since people cannot be excluded from enjoying the

benefits of a public good, individuals may withhold
paying for the good hoping that others will pay for it.

The free-rider problem prevents private markets

from supplying public goods.
Solving the Free-Rider Problem
The government can decide to provide the
public good if the total benefits exceed the
costs.

The government can make everyone better

off by providing the public good and paying
for it with tax revenue.
 Marginal Social Benefit of a Public Good
Total benefit is the dollar value that a person places on a
given quantity of a good.

The greater the quantity of a good, the larger is a

persons total benefit.

Marginal benefit is the increase in total benefit that

results from a one-unit increase in the quantity of a
good.

The marginal benefit of a public good diminishes with

the quantity of the good provided.
PRIVATE GOODS

Aprivate goodis a product that must be purchased to be

consumed, and its consumption by one individual prevents
another individual from consuming it. Economists refer toprivate
goodsas rivalrous and excludable.

In daily life,examples of private goodsabound, including food,

clothing, and most othergoodsthat can be purchased in a store. Take
anexampleof an ice cream cone . It is both excludable and rivalrous. It
is possible to prevent someone from consuming the ice cream by
simply refusing to sell it to them.
 Excludable Excludable
Rival Non-rival
(Pure Private Good) Cable TV
Most consumer goods Highways
Movies

Non-excludable Non-excludable
Rival Non-rival
Clean air and water (Pure Public Good)
National Defense
 The end
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