Question

What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free- rider problem as it relates to public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain.

Short answer

Public goods are non-excludable and non-rivalrous, necessitating public provision to address under-provision due to the free-rider problem. U.S. border patrol is a public good due to its non-excludable and non-rivalrous nature, while satellite TV is a private good because it is excludable and rivalrous.

Step-by-step solution

Define Public Goods

Public goods have two main characteristics: non-excludability and non-rivalry. Non-excludability means that no one can be effectively excluded from using the good once it has been provided. Non-rivalry implies that one person's use of the good does not reduce the availability of the good for others.

Public Provision vs. Private Provision

Public provision is significant because under private provision, non-excludability and non-rivalry make it challenging to charge individuals for their use, leading to potential under-provision of the good. With public provision, the government can ensure these goods are funded through taxation and are therefore available to all, circumventing the issues of exclusion and rivalry.

Explain the Free-Rider Problem

The free-rider problem occurs when individuals can benefit from a good without paying for it, due to its non-excludable nature. This results in under-provision of the good as private entities have no incentive to produce something they cannot charge for, ultimately necessitating public provision to ensure availability.

U.S. Border Patrol as a Public Good

U.S. border patrol is a public good because it is non-excludable; its security benefits cannot be denied to specific individuals, and it is non-rivalrous since providing security to one person does not diminish the level of security for others. Therefore, it is funded and provided by the government.

Discuss Satellite TV

Satellite TV is a private good because it is both excludable and rivalrous. Consumers can be prevented from accessing it unless they pay for the service, and one person's consumption reduces potential service options for others (e.g., limited broadcasting slots). Thus, it is usually provided by private companies.

Key concepts

Non-excludability

Non-excludability is one of the defining characteristics of public goods. It means that once a public good is provided, it is impossible or highly impractical to prevent anyone from using it. Imagine a lighthouse. Once it is built and its light is shining, you cannot stop ships from using the light to navigate safely. This inability to exclude people from the benefit of public goods creates a unique challenge.

Why does this matter? Non-excludability means people can enjoy the good without paying for it. This can discourage private companies from providing these goods, as they cannot ensure only paying customers benefit. Think about national defense: once a country is protected, every citizen benefits, whether they contribute to military funding or not. This makes government intervention and public provision more critical, ensuring these goods are still available to everyone.

Non-rivalry

Non-rivalry indicates that one person's use of a public good does not reduce its availability to others. For instance, a clean park is a public good that many people can enjoy simultaneously. Even if hundreds of people visit the park, it does not prevent others from enjoying it too. This is different from private goods, like a slice of pizza, where one person's consumption reduces what is left for others.

The significance of non-rivalry in public goods means they can potentially serve an unlimited number of people without additional costs. Because of this, charging per-use fees is not efficient, as it does not reflect the zero marginal cost of serving additional consumers. This is why public goods like public libraries or street lighting are often provided freely by the government, ensuring everyone can enjoy these benefits without the worry of depletion.

Free-rider Problem

The free-rider problem arises because of the non-excludable nature of public goods. A free-rider is someone who benefits from resources, goods, or services without paying for the cost of the benefit. This is a common issue with public goods because people cannot be easily excluded from using them once they are provided.

Let's take the example of fireworks at a public celebration. The show is non-excludable, meaning it can be enjoyed by those who don't pay for it. As many individuals opt not to contribute, there may be less funding available to actually provide the firework display in the first place, leading to under-provision of the service. This is why the public provision, typically funded through taxation, becomes essential. It ensures these goods are available, and everyone pays a share through taxes, reducing the free-rider problem.

Public Provision

Public provision refers to the government's role in supplying certain goods directly to the public, rather than leaving their production to private market forces. Because public goods are non-excludable and non-rivalrous, they often require public provision to ensure they are adequately funded and available.

Government provision offers several benefits:

• Ensures availability: Public goods like education, national defense, or public parks are made available to all, funded by taxpayers.
• Solves the free-rider problem: By using tax revenue, governments ensure that everyone contributes to the cost of public goods, addressing the under-provision linked to free-riding.
• Addresses market failures: Markets might not provide these goods due to the inability to secure profits, so public provision steps in to close the gap.

Public provision helps meet the needs that are unlikely to be met through private markets alone, providing equitable access to important services and resources.

Private Provision

Private provision involves the production and offering of goods by private individuals or businesses, typically seeking to earn a profit. Private goods are usually excludable and rivalrous, making them suited to private market provision.

In private provision, companies can impose limitations on access and charge fees, ensuring that only those who pay can benefit. For example:

• Excludability: Cable TV services or concert tickets are private goods because access can be restricted to paying customers only.
• Rivalry: A private tutor might only be able to teach a limited number of students at a time, making the service rival in consumption.

Private provision works well for goods or services that can be effectively managed through market transactions. However, it is not suitable for public goods because they inherently defy manipulation by simple market rules.