Unit 6: Market Failure and the Role of Government
6.3: Public and Private Goods
A public good is an economic good that is provided by the government in the public sector because the free market, or the private sector, has failed to produce them. The public sector is the market for public goods and services provided by the government at the federal, state, and local levels. The private sector is the free market for goods and services where all economic decisions are made by consumers who demand products and by firms that supply products.
Public goods are considered a type of market failure because the free market fails to produce essential goods and services that society needs and wants. With these particular types of goods, there is little to no profit to be made by supplying them, so it is impractical for these firms to produce them. One of the biggest reasons why there is little to no profit to be made is because of the free-rider problem:
There are two ways that the government can solve the free-rider problem, (1) they can find new ways to punish free-riders or (2) they can tax all citizens that are eligible to use public goods and use the tax revenue to fund public goods and services.
What are Public Goods?
In order for a good to be considered a public good it must meet two criteria (1) non-exclusion, and (2) shared consumption (non-rivalry). Non-exclusion means that everyone can use the good and those who do not pay cannot be excluded from enjoying the benefits. Shared consumption (otherwise referred to as non-rivalry) means that one person's consumption of the good does not reduce the usefulness of the good to others.
Let's look at some sample goods to see whether they meet these two criteria and can be considered public goods:
Those goods in the table above that can meet both criteria can be considered public goods. If it is a good that satisfies one of the criteria, it can be produced either in the public or private sector. If the good has neither characteristics than they are a true private good.
We determine how much of a public good to produce by determining where the marginal social benefit is equal (MSB) is equal to marginal social cost (MSC). Let's look at the options for how many parks a city should build:
Based on this data, we would produce 6 public parks since that is where MSB = MSC ($300 = $300).