Markets are ideally suited to the provision of private goods. Buyers know that when they purchase a good or service, they have rights to the exclusive use and benefits from the good or service. If a person buys and eats a hamburger, no one else can eat the same hamburger. Therefore, the hamburger is an example of a private good. A private good has these characteristics:
- each unit produced can be priced and sold to individuals
- those who donít pay can be excluded from owning/having the good
- private goods are produced and sold by businesses through markets.
A public good is one that is consumed collectively by people whether or not they pay for the good. In other words, people share the consumption of public goods (shared consumption) and non-payers canít be excluded from using the good (non-exclusion). A streetlight is a public good because many can share the consumption of streetlights. Those who donít pay canít be excluded from the benefit of a safer, well-lit environment.
Public goods have two basic characteristics:
- shared consumption which means that many share the benefits of the good at the same time. This is true of streetlights, police protection or national defense.
- non-exclusion which means that people cannot be prevented from using a good, even if they did not pay for it. All people receive the benefits of streetlights, police protection, and national defense whether they paid taxes or not. Ask for examples of other public goods and list the answers on the board.
The concept of free riding takes into account those who benefit from something for which they didnít pay. Generally, the problem of free riding occurs when individuals refuse to share in the cost of providing a public good.
Private businesses do not have an incentive to provide public goods because they wouldnít be able to exclude people who didnít pay for the goods. Public goods are socially desirable and cannot be effectively provided in private markets because people who donít pay canít be excluded and many people can share the consumption of the good. Generally, people expect governments to provide public goods because they are desirable and because private businesses arenít able to provide them.
Taxes are required payments to government. When governments collect taxes, they use part of the revenue to provide public goods. These are goods that benefit many people at one time and from which those who do not pay cannot be excluded. Examples of public goods that governments provide include national defense, flood protection, roads, bridges, lighthouses, fire protection, police protection and parks.