- 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 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 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
Make sure 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.