Economics: Public Goods

Public Goods and Private Goods

• A public good is a good that is non-rivalrous (consumption by one person does not reduce the amount available for others) and non-excludable (it is not possible to provide a good without it being possible for others to enjoy).
• Examples of public goods include national defense and street lighting.
• A private good is a good where the benefits accrue to the individual and others are prevented from consuming it. Private goods are rivalrous and excludable.
• Examples of private goods include apples and cars.

Asymmetric Information

• Asymmetric information occurs when one party has more information than other parties.
• This can lead to problems such as people being reluctant to buy second-hand cars due to lack of trust, resulting in lower prices for all second-hand cars.

Merit Goods

• A merit good is a good that people may underestimate or be unaware of the benefits of consuming.
• Examples of merit goods include vaccinations and a healthy workforce, which have positive externalities.
• The government may subsidize private doctors to treat people or pay for a national health service directly to ensure everyone has access to this important merit good.

Public Sector vs. Private Sector

• The public sector (government) provides goods and services, but not all goods provided by the public sector are public goods.
• The private sector has a profit incentive to cut costs and provide a more efficient service.
• Disadvantages of the private sector include the difficulty of introducing a profit motive in public services, potential for inequality, and underprovision of merit goods.

Government Intervention

• The government may provide information about certain goods to overcome market failure, such as warning about the health dangers of tobacco and alcohol.
• Regulation can be used to overcome market failure, but it depends on enforceability.
• Subsidies can be used to encourage consumption of underprovided goods, but they can be expensive and may not be effective if demand is inelastic.

Evaluation of Government Intervention

• Government advertising campaigns can be costly and may not be effective.
• Regulation can be simple and effective, but may not be the most efficient level of production in society.
• Subsidies can increase demand, but may require higher taxes and may not be effective if demand is inelastic.

Welsh Government Policies

• The Welsh government has introduced free NHS prescriptions to overcome the market failure of underconsumption of prescription drugs.
• Free prescriptions can help reduce inequality, but may require higher taxes or lower government spending in other areas.

Subsidies

• A subsidy is a payment by the government to firms to encourage consumption of underprovided goods.
• Subsidies can increase demand and reduce price, but can be costly to the government and may not be effective if demand is inelastic.

Positive Externalities

• A positive externality occurs when producing a good causes a benefit to a third party.
• Examples include beekeeping, which helps to pollinate nearby apple trees, and taking the train to work, which reduces traffic congestion.

Government Failure

• Government failure occurs when government intervention in the economy causes a net welfare loss.
• Causes of government failure include lack of incentives for government workers and unintended consequences of government intervention.

Learn about public goods, how they differ from private goods, and how they can be provided by the free market or the public sector. Understand the characteristics of public goods and how to identify them.