Private goods vs public goods
Two simple tests sort goods:
- Rival? If one person uses it, is there less for others? A sandwich is rival. A radio signal is not.
- Excludable? Can the seller stop people who do not pay? A cinema can (tickets). A street light cannot.
A private good is rival and excludable. A pure public good is non-rival and non-excludable.
| Excludable | Non-excludable | |
|---|---|---|
| Rival | Private good (food, clothes) | Common resource (fish in the open sea) |
| Non-rival | Club good (streaming service, toll road when empty) | Public good (street lights, defence, flood walls) |
Non-rival also means the extra cost of one more user is about zero. Another ship using a lighthouse costs nothing extra.
The free-rider problem
A free rider is someone who enjoys a good without paying for it. With a public good, free riding is easy because nobody can be shut out.
- Everyone gains from the good.
- But each person thinks: "If I do not pay, I still get it."
- So few people pay. People also hide how much they really value it.
- A firm cannot earn enough money, so it does not supply the good.
The result is a missing market: the good is not provided at all, or far too little is provided, even though society would gain from it. This is a market failure.
Quasi-public goods
Many real goods are only partly public. These are quasi-public goods (or impure public goods).
- A road is non-rival when empty, but becomes rival in a traffic jam (congestion). A toll gate can make it excludable.
- A public beach or park gets crowded at holidays.
- Street lighting is close to pure.
Technology can change a good's type. Television used to be non-excludable; encrypted satellite and streaming services made it excludable.
How governments provide public goods
- Direct provision: the state pays from taxes (defence, street lights, flood defences). Taxes are compulsory, so free riding stops.
- Contracting out: the state pays a private firm to build or run it (a firm builds the flood wall).
- Charging when possible: tolls on roads that can be made excludable.
Problem: the government does not know exactly how much people value the good, so it may provide too much or too little. This can lead to government failure.
Try it
Walk around your street. List 6 things you see. For each one, ask the two tests: rival? excludable? Put each in the 2ร2 table above. Which ones are public goods, and who pays for them?
Key formulas and definitions
- Private good = rival + excludable
- Public good = non-rival + non-excludable
- Non-rival: marginal cost of one more user โ 0
- Free rider = uses the good without paying
- Free riding โ too little paid โ missing market โ market failure
Worked examples
1. Is national defence a public good? Use both tests.
Non-rival: protecting one more citizen does not reduce protection for others. Non-excludable: the army cannot protect your neighbour but leave out your house. So it is a pure public good, paid for by taxes.
2. A lamp costs 8 coins. 8 homes each value it at 3 coins. Only 2 homes pay 1 coin each by choice. Is it built? Is that a good result?
Collected = 2 coins, cost = 8 coins, so it is not built. But total value = 8 ร 3 = 24 coins, which is more than the cost of 8. Society loses a good worth 24 for a cost of 8. This is the free-rider market failure.
3. A city highway is free and empty at night but jammed at 9 am. What type of good is it, and how could the city respond?
It is a quasi-public good: non-rival at night, rival in the rush hour. Non-excludable unless tolls are used. The city could charge congestion tolls at peak times to make it excludable and cut crowding.
Common mistakes
- Thinking any good the government provides is a public good. Schools and hospitals are provided by governments but are rival and can be excludable; they are merit goods.
- Mixing up non-rival with 'free'. Non-rival is about using it up, not about price.
- Forgetting both tests. A good must be non-rival AND non-excludable to be a pure public good.
- Saying the free-rider problem means people are bad. It is a sensible choice for each person that leads to a poor result for everyone.