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. LO4.3

Short answer

Public goods are non-excludable and non-rivalrous, leading to government provision to address the free-rider problem. U.S. Border Patrol is a public good; satellite TV is a private good.

Step-by-step solution

Understand Public Goods Characteristics

Public goods have two main characteristics: non-excludability and non-rivalry. Non-excludability means that it is not feasible to prevent anyone from using the good once it has been provided. Non-rivalry implies that one person's use of the good does not diminish the ability of others to use it. These characteristics imply that private markets may underprovide such goods because they cannot easily charge users.

Understand Significance for Public Provision

Because public goods are non-excludable and non-rivalrous, private companies may not have the incentive to provide them since they can't ensure a profitable return. The role of the government in public provision is to fund these goods through taxation, ensuring that everyone can benefit from them without exclusion.

Explain the Free-Rider Problem

The free-rider problem occurs because individuals may benefit from a good without paying for it, as is possible with non-excludable goods. This discourages private entities from providing these goods, as they cannot compel payment from all beneficiaries, leading to underinvestment or complete lack of provision if left to private markets.

Classify U.S. Border Patrol as a Public Good

U.S. Border Patrol is considered a public good. It is non-excludable because all citizens benefit from border security, and it is non-rival because one individual's benefit from this security does not reduce the security available to others. Thus, it is provided publicly for national security.

Classify Satellite TV as a Private Good

Satellite TV is a private good as it is excludable and rival. Only paying subscribers can access the content, and one person's access to a channel may limit the resources available for others. Providers can charge subscribers, which motivates private provision of this service.

Key concepts

Non-Excludability

Non-excludability is a vital feature of public goods. It means that once a public good is available, you can't stop individuals from using it, regardless of whether they have paid for it or not. This characteristic is what makes public goods fundamentally different from private ones. Imagine a lighthouse indicating safe passage for ships. Once it's operational, every ship in the vicinity benefits from its guidance, and there's no practical way to prevent ships that don’t pay from using the light.

In practical terms, non-excludability presents a challenge for private firms. Since anyone can use the good without paying, firms can't easily recover costs through direct sales or subscriptions, thus, disincentivizing private provision. Instead, governments step in to provide the funding, often through taxation, to ensure these goods are available for everyone to benefit from.

• Cannot exclude individuals from use
• Leads to difficulty in monetizing directly by private firms
• Necessitates government intervention and funding

Non-Rivalry

Non-rivalry refers to a condition where one person's consumption of a good does not diminish the ability of others to consume the same good. This is another signature feature of public goods. Consider a community park: one family can enjoy a picnic without reducing the ability of another family to also enjoy the park.

This characteristic allows public goods to serve multiple people without any extra cost for each additional user, making them efficient in terms of consumption. However, because the use by additional individuals doesn’t reduce the availability to others, it doesn’t generate the same urgency or pressure for payment as rivalrous goods might. Private markets often find it hard to monetize such goods, as charging for use doesn't align well with the non-rivalrous nature and can result in market failures, creating a need for public provision.

• Multiple users can benefit at once
• No additional cost for more users
• Unsuitable for traditional market-based pricing

Free-Rider Problem

The free-rider problem is an issue that arises due to the non-excludability of public goods. It describes the situation where individuals can benefit from resources, goods, or services without directly paying for them. This is quite common with public goods because they are available to everyone by nature, such as national defense or street lighting.

Imagine a fireworks display sponsored by a city. Everyone who can see it benefits without needing to pay. If too many people take this free-riding approach, the incentive for businesses to provide such displays diminishes because they can't generate enough revenue to cover the costs. Consequently, the free-rider problem often leads to underinvestment in public goods if they rely solely on private sector provision.

• Individuals benefit without direct payment
• Reduces incentive for private investment
• Results in potential underprovision of public goods