- Public good
- A public good is non-excludable and non-rival, so nobody can be kept from using it and one person's use leaves no less for anyone else.
- Private good
- A private good is a separate and identifiable item that can be bought and sold, like a slice of pizza.
Two tests for a public good, and two ideas built on them
Can you name the two tests of a public good, and the two ideas built on them?
The first two cards are the tests a public good must pass. The free rider problem is what non-excludability causes; a quasi-public good is one that passes the tests only in part.
Non-excludability means it is costly or impossible to exclude someone from using the good, whether or not they have paid for it.
Can you think of an example?
Police patrols cannot easily protect some houses in a street from burglary while leaving their neighbours unprotected. Protecting some necessarily means protecting the others too.
Non-rivalry means that when one person uses the good, another can also use it, so one person's use leaves no less for anybody else.
Can you think of an example?
One more listener tuning in to a radio broadcast leaves the signal just as clear for everyone who was already listening.
The free rider problem is when people have an incentive to let others pay for a good and then use it without paying, because they cannot be excluded.
Can you think of an example?
A town asks residents to chip in for a firework display. Each hopes the others will pay and plans to watch anyway, so donations fall short and the display may never happen.
A quasi-public good has only some of the characteristics of a public good, because one of the two tests fails or holds only part of the time.
Can you think of an example?
A country road is free to use, and one more car slows nobody down. On a bank holiday the same road is jammed, so each extra car delays everyone else: the road has become rival.
Check yourself
A country park is free and open to everyone. On a quiet weekday one more visitor spoils nothing, but on a sunny bank holiday its paths are packed. What kind of good is it on the bank holiday?
Because non-payers cannot be kept out, a market leaves public goods unprovided
A firm selling a public good cannot stop people who have not paid from enjoying it, so free riders leave it short of revenue. If everybody reasons that way the good is not provided at all, even though everybody wants it. People can defeat the free rider problem through the political process: they agree to pay taxes and require, through the law, that everyone contributes. So public goods are usually paid for out of taxation rather than sold.
Check yourself
A toll bridge that is never busy charges drivers to cross. Which characteristic of a public good does it lack?
Isn't a public good just anything the government provides?
No. The test is the two characteristics, not who pays for it. State schooling is provided publicly and is both rival and excludable — a place taken is a place nobody else can have — so it is not a public good. A lighthouse built by a private company still is one, because it cannot exclude any ship and its light is never used up.
Apply both tests by name and say which one fails. "Not a public good, because the toll makes it excludable" earns the mark where "not a public good, it is privately run" does not. Where only one test fails, or a test holds only when the good is uncrowded, call the good quasi-public and name the test.
Check yourself
Three of these are public goods. Which one is not?
Exam question
Explain why a private firm is unlikely to build a lighthouse for profit. [2]
It cannot exclude ships that have not paid from seeing the light, so those ships free ride and the firm cannot collect enough revenue to cover its costs.
One mark for non-excludability and one for the free rider problem it causes. The examiner wants the mechanism rather than the label: say who fails to pay, and why the firm cannot stop them.
A public good is non-excludable and non-rival: nobody can be kept from using it, and one person's use leaves no less for anybody else. A private good is neither. Because non-payers cannot be excluded a free rider problem arises, so the good is under-provided or not provided at all, which is why public goods are usually funded from taxation. Who provides a good does not decide what kind it is — the two tests do.