6.3 - Public and Private Goods

Classifying Goods

Economists sort goods by two traits: rivalry and excludability.

Rival vs. non-rival: - Rival goods get used up as they’re consumed (a donut, a burrito). - Non-rival goods aren’t diminished by use, tons of people can enjoy them at once (streaming music). For non-rival goods, marginal production cost is zero.

Excludable vs. non-excludable: - Excludable goods let you block non-payers (a concert, a phone plan). - Non-excludable goods can’t practically be restricted (a public fireworks show).

The Four Categories

Category	Traits	Examples
Private goods	Rival and excludable	Cell phones, burritos, clothing
Club goods (natural monopoly)	Non-rival and excludable	Streaming services, internet providers
Public resources	Rival and non-excludable	Fish in the ocean, timber in a forest
Public goods	Non-rival and non-excludable	National defense, tsunami sirens

The Free-Rider Problem

Public goods and other non-excludable goods suffer from the free-rider problem.

Free riders enjoy a good’s benefits without paying for it.

Since people can get it for free, there’s little incentive to pay, so market demand ends up far below the actual MSB.

The market produces way less ( $Q_E$ ) than the socially optimal amount ( $Q_S$ ), or nothing at all, creating a big triangle of deadweight loss.

Tragedy of the Commons

Public resources (rival but non-excludable) face a different problem: overexploitation. Since one person’s use leaves less for everyone, but nobody can be excluded, the resource gets overused, sometimes to the point of depletion. Governments typically respond by making the resource excludable somehow (fishing licenses, catch limits) to protect it.

These rival, non-excludable resources are also called common or open-access resources. Each user gets the full benefit of what they take (every fish caught is theirs to sell) but shares the cost of a shrinking stock with everyone else. Since each person weighs only their own benefit and cost, private individuals inefficiently overconsume the resource.

Government Provision

Since the free market fails to supply public goods efficiently, they’re usually provided publicly, funded through taxes and given to everyone, whether or not they’d personally choose to pay. This lets the government hit the socially optimal quantity, more efficient than what the private market could manage alone.

A quick analogy: picture a neighborhood streetlamp. It’s non-rival, your neighbor gets the same light whether you’re standing under it too, and it’s non-excludable, there’s no way to switch it off just for the people who didn’t chip in. If the electric company relied on door-to-door donations, most people would free ride, hoping someone else pays. Eventually the light goes dark from lack of funds, which is exactly why the city uses tax dollars to keep it running for everyone’s safety.

Government can provide private goods too. Sometimes the government produces a private good and lets people use it for free. Education is the classic example: a seat in a classroom is rival (one more student means less of the teacher’s attention for everyone else) and excludable (private schools charge tuition), so it isn’t a public good. Governments still offer free public schools because education creates positive externalities (a more educated population benefits everyone) and so every child has access, whatever their family’s income.

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