Public And Private

Goods

Public Goods

Introduction
Definition : good that is both Non-excludable and

Non-rivalrous
Non-excludability : Benefits cannot be confined to

only those who have actually paid for it

Non-rivalrous : Consumption by one person does not

reduce the availability of a good to everyone else

Quasi Public Goods

Quasi public goods : near-public good
They are :
Semi-non-rival
Semi-non-excludable

The Free Rider Problem

Each citizen who can enjoy the benefit of a public

good has an incentive to try to lay the whole burden

of provision on others, whenever the exclusion of
non-payers is very costly or impossible.
If too many consumers decide to 'free-ride', private

costs exceed private benefits and the incentive to

provide the good or service through the market
disappears. The market thus fails to provide a good
or service for which there is a need.

Government
provision

Taxation to fund the production of

public goods

Subsidies
and joint
products

Subsidize production of a public good

in the private sector
Joint-product model

Internet crowdfunding

Coasian
solution

Solution to Free Rider problem

Privileged group

A group of individuals who benefit

more from the public good than it
costs them to produce it

Merging free
riders

Eliminate the profit incentive for free

riding by buying out all the potential
free riders

Introducing an
exclusion
mechanism (club
goods)

Exclusion mechanisms which turn

public goods into club goods
Eg : Copyright and patent laws

Solution to Free Rider problem

Voluntary
organizations

Red Cross, Wikipedia, public radio

Philanthropy

Religions and
Ideologies

Encouraging deep-seated personal beliefs

Peer-to-peer punishment

More responsible citizens

Social behavior is contagious: people unconsciously
adapt their behavior to that of their peers

Social
sanctions
Social Norms

Altruistic Solution to the Free Rider Problem

PRIVATE GOODS

Introduction
Definition

: an item that yields

positive benefits to people that is
excludable and rivalrous

If there is a competition between

individuals to obtain the good and if

consuming
the
good
prevents
someone else from consuming it, a
good is considered to be a private
good
Examples : food, buying a car, cell

phones, getting a haircut, etc.

Characteristics Of Private Goods

Excludability: Consumers can be easily prevented

from consuming these products by the seller

Rivalry: One persons use or consumption of the

products reduces the amount of the product left for

another individual to consume and benefit from.
Rejectability: All private goods and services can be

rejected by the final consumer should their tastes

and preferences change.

Pricing of Private Goods

Follow the Law of Demand the price increases

when the demand is high but the supply is low

Issues with Private Goods

In practice, private goods exist along a continuum of

excludability and rivalry and sometimes may exhibit

only one of these characteristics. The absence of
excludability and rivalry introduces market failures
that ensure that some goods and services cannot be
efficiently provided by the markets.
Inefficiency in the production and consumption of
private goods can also arise when there are spill over
effects or externalities in the production
Fairness and justice issues

Difference Between Public And Private Goods

Features
Payment

Public Goods

Private Goods

Time and the method of

Payment is always done prior

payment are uncertain. In

to the receipt of goods.

most cases, payment is not

done at all.
Consumption

Anyone and everyone are

When the good or service is

free to consume the product.

consumed by one person or

The good or service are said

group, it becomes unavailable

to

to others.

be

consumption.

non-rival

in

Difference Between Public And Private

Goods
Benefits

Demand

No one is excluded from the

Benefits are limited to only the

benefits.

are

individual who consumes the good

collective benefits and can be

or service. He alone will be

used by the entire society as a

benefitted by the consumption of

whole.

the product.

The

benefits

Consumers cannot pick and choose Consumers are free to pick and
the product or service they want.
The quantities for the product or
service are fixed.
Demand for the product or service
is always summed vertically.

choose the goods and services as

they wish.
Quantities demanded for each good
and service is totalled to make up
the total market demand.
Demand for the product or service is
always summed horizontally