Why compare public goods and private goods and understand the role for them in the economy?
Decisions made by firms and individuals in a market often have a spillover effect on other people, whether it be for good (like your neighbor’s sweet-smelling cookies), or for the bad (the smelly paper plant that opened up a mile away). In this module, we learn about these positive and negative externalities, as well as the range of public versus private goods.
One of the characteristics of any good or service is its “public” or “private”-ness. Goods can be public or private or anything in between. What does this mean? It’s probably not what you think. It doesn’t primarily mean who provides it. In other words, a good is not private because it is provided by private businesses. A good is not public because it is provided by the government. Rather, private/public is more a description of how these goods are consumed.
All of us consume private goods and public goods. There are three basic cases: A private good is one for which the consumer pays all the costs and receives all the benefits. If you buy an apple to eat, no one gets to share any part of the apple that you eat. A public good is one where one person’s consumption doesn’t prevent anyone else from consuming it too. National defense is the classic example Once it’s there, everyone gets the benefits of it. This leads to “free riding,” where people try to avoid paying for the public good since they’ll get the benefits anyway. In between public and private goods are externality goods (or semi-public goods). Externality goods are characterized by spillovers. People may benefit without paying for externality goods. Or they may have to pay some of the costs without gaining any of the benefits. One example is public K-12 education. Children benefit without paying. Even their parents don’t pay the full cost of their education, which tends to be paid for with property taxes regardless of whether the property owner has children in school.
- What are some other examples of private goods? (Hint: most of the things you consume are private goods.)
- What are some other examples of public goods?
- How can “free riding” be prevented?
- What are some other examples of externality goods (or externalities in general)?
- Why does it make sense for society to pay for public education, when not everyone has children?
It is understood that a market economy does not fully address all of the needs in a society. These inefficiencies in the way a market economy allocates goods and resources is known as market failure. Watch this video to see how externalities and public goods are examples of market failure.
Public goods and externality goods tend to be either supplied too much or supplied too little compared to what is optimal for society. What policies can government pursue to ameliorate this?
Let’s find out.
Introduction to Public Goods
Decisions made by firms and individuals in a market often have a spillover effect on other people, whether it be for good (like your neighbor’s sweet-smelling cookies), or for the bad (the smelly paper plant that opened up a mile away). In this module, we learn about these positive and negative externalities, as well as public goods, which are typically provided by the government and made freely available to all.
- Contrast between public and private goods
- Explain the concept of free riders
- Define and give examples of positive and negative externalities
- Analyze the efficacy of government policies to lessen negative externalities and analyze how the government promotes positive externalities
- Analyze the impact of market-based solutions to negative externalities