PUBLIC GOODS

Public goods were defined by Samuelson as one “which all enjoy in common in the sense that each individual’s consumption of such goods leads to no subtraction for any other individual’s consumption that good. Examples are National Defence, Roads, Street Lights, etc.

From the above definition, we can derive two important features of public goods –

Non-rivalry

An important characteristic of public goods is that they are non-rival in consumption, which is not the same in the case of private goods. For e.g. If a person A eats a burger or wears a pair of shoes, then he is the only one to enjoy utility derived from that consumption. In the other words, A will not allow others to consume his burger or wear his pair of shoes as it will reduce his utility. Thus, it is a case of rivalry in consumption.

For e.g. If a person A eats a burger or wears a pair of shoes, then he is the only one to enjoy utility derived from that consumption. In the other words, A will not allow others to consume his burger or wear his pair of shoes as it will reduce his utility. Thus, it is a case of rivalry in consumption.

On the other hand, if we talk about a public good say fireworks show organized by the government, if A is watching the fireworks and B also join in, then in such a case B looking at the fireworks does not reduces A’s utility about how beautiful the fireworks looking.

Thus an important implication of this characteristic is that while considering the aggregation (market) demand for such goods, individual demands must be joined vertically and not horizontally as in private goods.

Non-excludability

The second characteristic is that consumers cannot be excluded from consumption of public goods, as is the case in private goods.

In the case of private goods market, producers may exclude a consumer in the consumption of its goods, as the market is based on a market mechanism which works on the basis of property rights, where the consumptions are contingent upon payment of the price and thus the consumer is unable to offer payment will be excluded.

But in the case of public goods price mechanism cannot be enforced, as the benefits from social goods are not vested in property rights of an individual and thus it has non–excludability.

For e.g. following the same example earlier as the fireworks once lighted in the sky, one individual consumer cannot exclude the other consumer (spectator) to watch the fireworks on the grounds that he did not pay for it.

Thus as benefits available to all and a lot of consumers involved, no consumers offer voluntary payments, everyone sits idly for the fact that once someone pays for the good, others can enjoy it freely. Since no payments are made the linkage between supplier and buyers of good is broken and the market cannot function. It is where the government has to step in to provide for such goods and services. But the question arises how?

The main problem is not about covering cost or collecting revenues, it can merely be done by just sending a tax collector to each individual who consumes it. The main problem is what quality and how much of such good should be provided?

This leads to the “free – rider” problem, as people don’t offer voluntary payments, thus they have no initiative to step ahead and reveal their preferences that how much they value these goods and services, which leads to a problem of how much of such goods should be provided and how much each individual should be asked to pay for it.

This is where the political process must enter the picture, as a substitute to the market mechanism. Voting by ballots must be adopted in place voting by bids since voters know that they will be subject to voting decision, they will find it in their interest to vote such that outcome falls closer to their interest.

This eliminates the problem of preference revelation through the market and cost and quantity such goods can be derived.

SOURCES/ REFERENCES:

https://en.wikipedia.org/wiki/Complementary_good
http://www.academia.edu/1024423/Public_Goods