Public
Goods
SLO- Describe, explain and analyse as
appropriate;
•
Public and Private Goods
•
Collective goods and the Market
•
Collective provision of Public
Goods
Do now.
Discuss the following questions
with the person beside you
 What
would NZ be like without a police
force?
 How would people protect themselves
and their property?
 How would those who couldn’t afford to
pay for protection survive?
 How do you prevent people who haven’t
paid benefiting?
Types of Economic Goods
Types of Economic Goods
Private Goods
 Rival
 Depletable
 Excludable
by price
 Clear price signals
 No significant externalities
 Social equilibrium = Market
equilibrium
 Allocative efficient situation
Mixed Goods
 Have
externalities
 Market equilibrium ≠Social Equilibrium
 Market Failure
The nature of Public Goods
 Non-rival

One persons consumption of the good does
not reduce its availability to others.
 Non-excludable

by price
Once the good has been provided it is not
possible to prevent others from using it even
if they haven't paid to use it.
 Non
depletable
 No clear price signals.
 Often provided by government
Public Goods and free-rider
Behaviour -notes
A
free rider is a person who consumes a good
without paying for it. (People who use a public good
without contributing for its payment)

Public goods result in free rider behaviour because
they are non-excludable by price.
 What
does this mean??
 If you were a producer of street lamps
how would this behaviour affect you?
Public Goods
 Consumers
know they can use
a public good without paying
for it, so producers in the
private sector will be unable
and unwilling to produce these
goods.
 As
it is not possible for them to
make a profit.
How are public goods
produced then? notes
 In
many cases for a public good to be
available at all the government will need to
provide them.
 How
does the government pay for these
goods?
 The
government will charge
people collectively through
the tax system
Collective goods - notes
 These
public goods funded in this way are
classified as collective goods.
 Collective
goods – goods that are provided free
of charge and are paid for collectively through
the tax system
 Example,
rates
public footpaths, street lights paid from
What about Roads?
 Some
people claim that roads are a
public good. But some could are they are
not.
 Thank
about this, then discuss with your
neighbor.
Roads

Non rival- one person using the road does not
stop others from using it, until congestion sets
in.

Non excluable- Once the road is built it is
generally not possible to prevent others from
using the road.

Because of this free rider behaviour the govt
usually provides roads free of charge. Most
roads are paid for through tax.
But….
 Private



vehicle owners pay…
Registration fee
Road user charges
Tax on petrol
What about road tolls?
There is a possibility with
technology that in the future
roads will be provided by the
private sector or though public
private partnerships.
User Pays
 Consumer
have to pay to use a good or
service, such as paying a toll to use a
road.
Once a good has been
provided for it costs no more
for another person to use it
therefore MC=0
PUBLIC GOODS
MODEL -notes
Charging a fee on a bridge.
$
Al locative efficiency is where
MC=MB
capacity
The model shows that
charging a fee for the public
good, in this case, results in a
loss of welfare not gained by
another party.
MB
Fee
$2
Q
We can conclude it is more
efficient to build a bridge
from taxes and not charge for
it.
Total benefit less total cost
Loss of welfare (CS)
Total
benefit
Total cost
Public goods and the media
A
lot of media broadcasting is non-rival
and non excludable.
 Some
broadcasters work towards
privatising the positive externality
 Sky
TV - scrambles the signal to prevent
potential free riders.
Other types of goods
Rival
Non rival
Excludable
Nonexcludable
Private goods
e.g. food,
clothing
Club goods
e.g. Sky TV
Common pool
resources
e.g. fisheries
Public Goods
e.g. lighthouse
Allocation of Public goods

Weak and non existent price signals means
that market allocation is not possible.

How do you think we choose which public
goods are to be provided?

The political system! And voters

The socially optimal output of public goods is
where MSB=MSC, or where TSB-TSC is at a max
Public
GOODS ALLOCATION
MSB=MSC
TSB-TSC maximum
TSB
$
$
MSC
TSC
MSB
Q
Q
Society also needs to determine the best mix of
public goods.
Roading, defence, health care, and education.
Healthcare
What determines the mix of
public goods?
There will be a trade off involved. Due to scarcity.
We cannot have everything in the quantities we
want due to insufficient resources.
If more healthcare is provided there might be less
education.
Education
Exercises page