Some goods may not be produced at all through the markets, despite offering significant benefits to society. When this occurs, it is known as a ‘missing market’ and the goods are called public goods. These goods involve a large element of collective consumption: for example, national defence, flood defence systems, the criminal justice system, and refuse collection.
Public goods are defined by their characteristics of non excludability and non-rivalry.
- Non-excludability means that one a good has ben produced for the benefit of one person, it is impossible to stop others from benefitting
- Non-rivalry means that as more people consume a good and enjoy its benefits, it does not reduce the amount available to others. In effect, it is non-diminishable.
Once a public good has been provided, the cost of supplying it to an extra customer is zero. Further examples include firework displays, lighthouses, public beaches, public parks, and street lighting.
Private goods are the opposite of public goods. They display characteristics of rivalry and excludability in consumption. An example of a private good is a Mars bar. The consumption of which directly excludes others other people from consuming that particular bar. The owners of private goods are able to use private property rights which prevent other people from consuming them. Provate goods can also be rejected which means one has a choice in wether to consume them or not.
The under-provision of a public good
Public goods are under-provided due to two problems.
- The free rider problem. Once a public good has been provided for one individual, it is automatically provided for all. The market fails because it is not possible for forms to withhold the good from those consumers who refuse to pay for it. Examples are national defence and security along a street.
- The valuation problem. It is difficult to measure the value obtained by the consumers of public goods and hence it becomes hard to establish a market price for them. It is in the interest of consumers to under-value the benefit gained from a public good so that they pay less for it; but it is in the interest of producers to over-value the benefit obtained from a public good in order to charge more for it. The uncertainty over valuation may deter firms from providing public goods.
The rational customer wait for someone else to provide the good, and then reap the rewards by consuming it for fre. However, if everyone waits for others to supply a public good, then it may never be provided. The non-excludability characteristic means that the price mechanism cannot develop as free-riders will not pay.
Government provision of public goods
In a mixed economy, the government tends to provide public goods in order to correct market failure. It raises funds from general taxation to pay for their provision. Without government intervention, public goods may be under-provided or not provided at all. The actual quantity provided will be les than the amount required for achieving the socially optimum provision.