"Public versus Private Goods" Please respond to the following:
• Compare and contrast the demand curve for public goods and the demand curve for a
private good. Evaluate the impact of the current trend toward the expansion of
government services.
For a private good, finding the market demand at any given price involves summing the
horizontal distance between each of the private demand curves and the vertical axis at that
price. This process is called horizontal summation. For a public good, the group willingness
to pay is found by vertical summation of the individual demand curves. for standard private
goods, everyone sees the same price and then people decide what quantity they want. For
public goods, everyone sees the same quantity and people decide what price they are willing
to pay. With a private good, everyone has the same Marginal rate of substitution, but people
can consume different quantities. Therefore, demands are summed horizontally over the
differing quantities. For public goods, everyone consumes the same quantity, but people can
have different Marginal rate of substitution. Vertical summation is required to find the group
willingness to pay.
Someone who lets other people pay while enjoying the benefits himself is known as a free
rider. The market may fall short of providing the efficient amount of the public good. Free
rider problem necessarily leads to inefficient levels of public goods; therefore, efficiency
requires government provision of such goods. The argument is that the government can
somehow find out everyone's true preferences, and then, using its coercive power, force
everybody to pay for public goods. If all this is possible, the government can avoid the free
rider problem and ensure that public goods are optimally provided.
The demand curuve for private goods are generally obtained by adding the quantities
damanded by each person a person a specific price. The demand curve for public goods can
be obtained by adding the indivdual marginal benefits of each quantity. The demand curves
are similar because each one is calculated by the total demanded and the total benefit. The
differences in the the two is that private goods measures aggreate of each person and public
goods measures the benefits of the whole sample size or group.
The current trend towards the expansion of goverment services is increasing. This weeks
reading discussed how public goods create positve externalities. Goverment services tend to
expand because the services are not sold privately and ultimately benefit society as a whole.
Financing these services is done through taxation, despite the fact many individual despise
the increase in taxes, there is a commonality that suggest increases are acceptable if it
benefits everyone.
Public goods are non-rival in consumption, total or market demand is obtained by summing
the value that each consumer obtains from a given quantity. For private goods that are rival in
consumption, market demand is obtained by summing the quantity each consumer is willing
to by at a given price.
Public goods (as well as near-public goods) are characterized by non-rival consumption,
meaning that every member of society can receive benefits simultaneously. As such the
overall value of public goods is obtained by summing the value that each individual receives
for a given quantity. The non-rival nature of public goods consumption makes the derivation
of the market demand different from that of private goods (as well as common-property
goods). The difference is horizontal versus vertical.
The market demand for private goods is derived through the horizontal summation of
individual demand curves. The market demand for public goods is derived through the
vertical summation of individual demand curves. For private goods, market demand answers
questions like : What is the total quantity that buyers would be willing to purchase at a given
price? For public goods the total or market demand answers the question: What is the total
value or benefit generated from consuming a given quantity?
Non-rival consumption makes the derivation of the demand for public goods a different
story. Everyone can enjoy the benefits of a public good simultaneously. The consumption by
one person does not prevent the consumption by another. As such, the value society receives
from a public good does all who enjoy the benefits receive the sum of the value. This means
that the demand for public goods is based on the vertical summation of individual demand
curves. On the other hand private goods are rival in consumption, the production of one more
unit of the good can be consumed only by one person. Efficiency is then achieve when the
extra benefit received by that one person is equal to the extra cost of production.
• From the e-Activity, explain the concept of the free rider problem, analyze how it
impacts the market, and suggest strategies to limit its negative effects.
A free rider is a person who basically enjoys the benefits of goods without contributing to
the full cost or partial cost of providing them. This problem usually arises when there are
spillover benefits or costs in the provision of goods.
Free riders suggest that a person benefits from public goods and services without making any
contributions to finance the activities. Free riders behavior impacts the market by driving up
the cost. Someone has to finance the activities regardless of the mere fact that it benefits
everyone, if everyone is paying his or her fair share than the cost associated to finance these
goverment will be a lot lower. Some common statergies to limit the negative affects would
be to monitor the contributions of individuals similar to the way the goverment tracks social
security contributions.
The free rider problem is usually more acute in the case of public goods. Public goods are
those where we cannot exclude others from their consumption, unless incurring substantial
cost if the goods are provided at all, and the consumption by anyone does not reduce the
amount available to others. Examples of pure public goods are national defense and
environmental quality. The spillover effects of public goods deem it necessary to provide
these goods collectively either through taxes and or subsidies.
The free rider problem in several markets is very pervasive. The free-rider problem of public
goods is one of four key reasons that markets might fail to efficiently allocate resources.
-Market Control: Market control arises when buyers or sellers are able to exert influence
over the price of a good and/or the quantity exchanged.
-Externality: An externality exists if a benefit is not included in the demand price or a cost is
not included in the supply price. This means that the demand price does not reflect all
benefits of a good or the supply price does not reflect all opportunity cost of production.
- Imperfection Information: The lack of information among buyers or sellers often means
that the demand price does not reflect all benefits of a good or the supply price does not
reflect all opportunity costs of production.
There are a variety of ways to cope with the free rider problem. Sometimes there are
alternative ways to provide a service that makes exclusion possible: window screens are a
substitute, though hardly a perfect one. Another way to overcome free rider problems is
through social pressure. Community leaders recognize a problem and organize to solve it.
Those who do not cooperate can be ostracized or in some way their relations with the rest of
the community can be adversely affected. An alternative to the social pressures of voluntary
groups is the coercion of the government.
Free-rider occurs when either individuals or organizations of a society benefit more than their
fair contribution of the use of state resource, or shoulder less than the fair share of the cost of
the production of public goods. Free riding is usually considered to be an economic problem
only when it leads to the non-production or under-production of a public goods (and thus to
Pareto inefficiency), or when it leads to the excessive use of a resources or property
belonging to all. In this case, the market is impacted because it does not allow the efficiency
in market production to be achieved (Battaglini, Nunnari, & Palfrey, 2012).To limit the
negative effect of the free-rider, there must be a compulsory payment enforce by the
government which in this case is the taxation system of financing public goods. Taxation,
although is a compulsory payment not all people are caught in the tax net, hence, some
people still remain free-riders (Hyman, 2011). Another way which may or may not be
possible is to encourage people to offer voluntary service (in-kind services) if they cannot
afford to contribute in cash.
References
Battaglini, M., Nunnari, S., & Palfrey, T. (2012, May 17). Retrieved January 26, 2013, from
The Free Rider Problem: a Dynamic Analysis:
http://www.princeton.edu/~mbattagl/free_rider.pdf
Hyman, D. N. (2011). Public Finance. Mason: South-Western Cengage Learning.