Y1 26) Public Goods

Summary

In this video, the speaker explains the concept of public goods, which are non-excludable and non-rivalrous, making them difficult for the private market to provide. These goods, such as streetlights and roads, lead to market failure due to the free-rider problem, where individuals benefit without paying. The solution often involves government provision funded by taxes. However, some goods, like roads and beaches, may sometimes be quasi-public, allowing for private provision through mechanisms like tolls. The speaker also discusses the role of technology in enabling more efficient private provision, changing the dynamics of public goods in modern economies.

Takeaways

• 😀 Public goods have two key characteristics: they are non-excludable and non-rival.
• 😀 Non-excludability means no price can be charged to exclude others from enjoying a public good's benefits.
• 😀 Non-rivalry means the quantity of a public good does not diminish as more people consume it.
• 😀 Streetlights are a classic example of a public good because they benefit everyone without diminishing when consumed.
• 😀 Beaches are another example where they are non-rival because the beach size remains the same regardless of usage.
• 😀 The 'free rider' problem occurs when individuals benefit from a public good without paying for it, leading to under-provision.
• 😀 When everyone adopts the 'free rider' mindset, there will be no private incentive to supply public goods, causing market failure.
• 😀 A complete market failure happens when there is a massive demand for public goods but no supply from the free market.
• 😀 Governments typically provide public goods through tax revenue to avoid market failure.
• 😀 Quasi-public goods have both public and private good characteristics, like roads and beaches, which could allow for private provision.
• 😀 Technological advancements, such as electronic toll systems, can make public goods excludable and rival, potentially allowing for private provision.

Q & A

What are the two fundamental characteristics of public goods?

Public goods have two fundamental characteristics: they are non-excludable and non-rival.

What does 'non-excludable' mean in the context of public goods?

'Non-excludable' means that no price can be charged for a public good that excludes others who have not paid for it, allowing everyone to benefit from it regardless of payment.

Can you give an example of a non-excludable public good?

An example of a non-excludable public good is street lights. Once a street light is on, everyone in the vicinity can benefit from it, not just the person who might have contributed to its cost.

What does 'non-rival' mean in relation to public goods?

'Non-rival' means that the consumption of a public good by one person does not reduce the availability of that good to others.

How does the concept of non-rivalry apply to public goods?

Non-rivalry applies to public goods by ensuring that when one person consumes the good, it does not reduce the quantity available for others. For example, when someone uses a streetlight, it remains available for everyone else.

What is the free rider problem, and why does it occur?

The free rider problem occurs because individuals can benefit from public goods without paying for them. Since the benefits of the good cannot be confined to just the paying individual, and the good is non-rival, people have an incentive to not contribute and instead free ride on the contributions of others.

What type of market failure does the free rider problem lead to?

The free rider problem leads to a complete market failure, where there is significant demand for public goods, but no one is paying for them, resulting in a missing market and no supply of those goods.

Why are private firms unlikely to supply public goods?

Private firms are unlikely to supply public goods because there is no way to charge for them effectively. Since public goods are non-excludable and non-rival, firms cannot make a profit, and therefore have no incentive to provide them.

What is a quasi-public good, and how does it differ from a pure public good?

A quasi-public good is a good that sometimes exhibits the characteristics of a public good (non-excludable, non-rival), but in certain circumstances, it may also show the characteristics of a private good (excludable or rival). Examples include roads and beaches.

How can technology impact the provision of public goods?

Technology can make the provision of public goods more efficient and even allow for private provision. For example, technology can be used to make roads excludable via electronic toll systems, which can change the way public goods are priced and supplied.