What is Public Goods and Private Goods?
All goods and services differ in terms of two basic properties:
- Rivalry: the extent to which the consumption of a good by one person diminishes its availability to others
- Excludability: the extent to which non-payers can be excluded from consuming a good
Public goods are goods or services that are to some degree both non-rival and non-excludable.
For example, national defence and New Year’s fireworks are public goods, i.e. one person viewing fireworks does not diminish its value to other viewers, and it cannot charge admission.
Public goods have a community demand but can't be delivered for a profit, e.g. streetlights, which is why they are often provided by the government. Pure public goods are those that area completely rivalrous and present no possibility of exclusion.
Private goods are goods or services that are both excludable and rivalrous in consumption.
E.g. hamburgers, if one person eats it then nobody else can eat it and those who don’t pay can't eat it
Common goods are goods, services or resources that are rivalrous but non-excludable. E.g. a fish in the sea can be fished by anyone, but once fished it is no longer available to anyone else
Collective goods are goods and services that are non-rivalrous and excludable. E.g. pay TV is not available to people who don’t pay for it, but an additional viewer does not diminish its value to other viewers.
Differences between Private and Public Goods
- Measure of Benefit
- Benefit of an additional unit of private good is the highest sum that a buyer is willing to pay
- Benefit of an additional unit of public good is the sum of reservation prices of all people who would benefit from that good
Ø Construction of Demand
- Market demand curve of a private good is the horizontal addition of all individual demand curves, e. choose a price and add all the quantities
- Market demand curve of a public good is the vertical addition of all individual demand curves, e. choose a quantity and add all the prices
