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.