Economics Exam Notes - Public Goods + Private Goods

Explain the difference between private and public goods Private Goods

Public Goods

Rival goods

Non-rival goods

Once you have it, you are the only person

One person’s use does not diminish other 

who benefits.

people’s use or benefit.

Excludable by price

Non-excludable by price

People can be prevented from using a

People cannot be prevented from using a

private good.

public good.

You don’t get one unless you pay.

Free-rider problem

Cannot be provided by govt

Must provided by govt/central authority

More efficient

Less efficient

Ice-cream/clothing/congested Ice-cream/clot hing/congested toll road

police/army/ uncongested non-toll road/ street lamp/light house

Private goods are both excludable and rival in consumption. People can be prevented from using a private good. You don’t get one unless you pay. Once you have it, you are the only person who benefits. You don’t give your shoes to someone. Private goods can be rejected. If you don’t like soup on the restaurant menu, you can use your money to buy something else. The characteristics of pure public goods are the opposite of private goods. Pubic goods are non-excludable, so people cannot be prevented from using a public good. Public goods are non-rival non- rival in consumption. One person’s use does not diminish other people’s use or benefit, such as light house. Public goods cannot be provided by private sector. If  we leave it to private sector there will be market failure. Non-excludability by price results in the free-rider problem. Due to this free-ridership issue private markets tend to undersupply public goods or not supply at all. Thus, public goods must be provided by the government or central authorities. The government can make everyone better off by providing the public good and paying for it with tax revenue.

Explain why private industrial firms in the process of manufacturing may cause negative externalities, and describe measures that a government could take mitigate the adverse effect of such negative externalities. You are expected to use a diagram to illustrate your answer.

Govt use taxation when mkt fails due to negative externalities : In this case, mkt fails when goods are underpriced, too much consumed and too much produced. Gov’t imposes an indirect tax on the product. Indirect tax raises the firm’s cost of production which causes supply curve to shift to the left. As supply curve shifts to the left price will go up from the market price to the social optimum price. An increase in the price will results in the decrease in the q’ty demanded; from the market q’ty demanded to the social optimum q’ty demanded what is best for the society. Taxation helps to overcome mkt failure because less is demanded, less is consumed and less is produced. Govt try to correct market failure by internalizing externalities through imposing a tax on the industry that caused pollution. Govt cannot solve the problem but try to mitigate the problem and achieve the best possible outcome.