Characteristics of Public Goods
Private Goods:
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Excludable and Rivalrous: Firms can provide private goods to generate profits because they can exclude customers through pricing mechanisms, and there's rivalry among consumers for limited supply.
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Profit Generation: Exclusion and rivalry enable firms to generate profits.
Public Goods:
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Non-Excludable and Non-Rivalrous: Public goods, like roads and national defence, are beneficial to society but not provided by private firms because they lack exclusability and rivalry.
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Government Provision: Governments often provide public goods due to their non-excludable and non-rivalrous nature.
Free Rider Problem:
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Non-Payment by Consumers: If firms attempt to provide public goods, consumers may realise they can access them without paying.
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Free Riding: Consumers who can access the goods without payment may stop paying, leading to under-provision by firms over time.
Government Intervention in Response to Public Goods
1.
Do Nothing:
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No provision is offered.
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Public goods remain under-provided.
2.
Provide the Good/Service Directly:
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Examples: Libraries, parks.
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Government directly provides the good/service.
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Funding comes from government budgets.
3.
Contract Out:
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Government accepts bids from private companies to provide the good/service.
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Chooses the lowest-priced bid and pays the company.
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Funding still originates from government budgets.
Funding Decision Opportunity Cost
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Opportunity Cost: Any funding decision carries an opportunity cost, meaning allocating resources to one area means forgoing other potential uses of those resources.