Government and Business

Market Failures

Public vs. Private Goods

Private goods- those whose benefits are rival in consumption and for which exclusion of those who refuse to pay is relatively easy.

Characteristics:

1) Benefits accrue exclusively (or almost exclusively) to the individual consumer.

2) Good is consumable in easily divisible units.

Result: the so-called “exclusion principle” is operable; no (or very limited) opportunity for free riders; market able to function.

Public goods (sometimes called “pure public goods”) - those that provide benefits to all members of a community as soon as it is made available to any one person.

Characteristics:

1) Nonexclusion. Benefits are shared benefits; accrue to all members of the community

2) Consumable in non easily-divisible units

Result: Creates not only opportunities, but also incentives, for free riders. Market fails to function efficiently.

The territory between:

Some goods fall between the two categories; they exhibit some characteristics of both public goods and private goods, but fit neither category completely.

Consequently, a new terminology/categorization has developed. Goods that fit the definition of private goods are referred to as “individually consumed goods” and those that fit the description of public goods are called “collectively consumed goods.”

The “in-between” cases then are referred to as “semi-collectively consumed goods”.

The primary distinguishing characteristic of a semi-collectively consumed good is that the benefits (or costs) accrue primarily to the individual consumer, but there are significant third party effects.

These third party effects are variously referred to as “social spillover benefits”, “positive externalities”, or “neighborhood effects” if positive in nature; or “social costs”, “negative externalities” if negative in nature.