Public Goods:
- Public goods possess two key characteristics: they are non-excludable and non-rivalrous. These goods are typically undersupplied in a free market due to a phenomenon known as the "free-rider problem."
- Although public goods are absent in free markets, they offer societal benefits. Examples include street lights and flood control systems.
- Non-excludability means that when one person consumes a public good, others can also benefit from it without any obstruction. Furthermore, public goods are non-rivalrous, meaning that the enjoyment of these goods by one person does not diminish the benefit others receive.
- The non-excludable nature of public goods gives rise to the free-rider problem. Consequently, individuals who do not pay for the good still reap its benefits, just like those who do pay. This is why the private sector often underprovides public goods because it doesn't generate profit from supplying them. Consumers may opt not to pay for the good when they can still enjoy its benefits without payment. Consequently, the marginal social benefit exceeds the marginal private benefit, resulting in a welfare loss and market failure due to underprovision.
- In contrast, private goods are rivalrous and excludable. For instance, a chocolate bar can only be consumed by one individual, and private property rights can be employed to restrict others from consuming the good.
Quasi-Public Goods:
- Quasi-public goods exhibit characteristics that partially resemble both public and private goods. They possess qualities like partial excludability, rejectability, and non-rivalry. A classic example of a quasi-public good is a road or pathway. This raises questions about how to manage and fund these goods. For instance, how should users of a road or a fence surrounding a park be charged?
Underprovision of Public Goods:
- Public goods often face underprovision because measuring the value that consumers derive from them is challenging, making it difficult to determine an appropriate price for these goods. Consumers tend to undervalue the benefits, resulting in them being willing to pay less, while producers may overvalue them, leading to higher potential charges.
Role of Governments:
- Governments are responsible for providing public goods, and they must estimate the social benefit of these goods when determining the quantity to supply. These goods are typically funded using tax revenue. However, the quantity provided by the government is often less than the socially optimal quantity due to challenges associated with accurately assessing the value and preferences of consumers.