- Why do markets fail to provide public goods?
Most goods and services produced in the marketplace are private goods and services. Private goods and services have specific characteristics. The consumption of a private good or service reduces the amount of that good or service available for others to consume. It is easy to exclude those who do not pay from receiving the benefits of the good or service once it has been produced. Examples of private goods include apples, shoes, glasses, pens, and ice-cream cones.
Public goods and services are characterized by shared consumption and non-exclusion. Non-exclusion means that it is difficult to exclude those who don’t pay from receiving the benefits of a good or a service once it is produced. Shared consumption means that the consumption of a good or service by one individual does not reduce the amount available for others to consume. Because a producer in the marketplace cannot exclude those who do not pay and because many people can share the consumption of public goods and services, private markets will not provide these goods and services. There is a role, then, for government to provide them with tax dollars.
Examples of public goods include national defense, highways, and streetlights. Governments provide many goods and services; however, only those that exhibit these two characteristics—shared consumption and non-exclusion—are considered pure public goods and services.
The U. S. economy is a mixed economy, which provides goods and services through markets and federal, state, and local governments.
Brainstorm examples of private and public goods that people consume. Record the examples on the board or on chart paper, using the following headings:
- Private Goods (Use “Street Light” as an example to start this chart)
- Public Goods (Use “Hamburger” as an example to start this chart)
Review the list and talk about the difference between private and public goods. Use the first example on each chart to further clarify the definition:
- If you don’t pay for a hamburger at the restaurant, can you be kept from getting a hamburger?
- If you consume your hamburger, does this prevent others from consuming the hamburger?
- If you don’t pay for a streetlight, can you be prevented from receiving benefits from the streetlight?
- If one person uses the streetlight, does this prevent others from using the streetlight?
- Who benefits from consuming a hamburger?
Have students read the two paragraphs below.
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 don’t 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 can’t be excluded from using the good (non-exclusion). A streetlight is a public good because many can share the consumption of streetlights. Those who don’t pay can’t be excluded from the benefit of a safer, well-lit environment.
Public goods have two basic characteristics:
- Shared Consumption – Many share the benefits of the good at the same time. This is true of streetlights, police protection or national defense.
- Non-Exclusion – 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 pay 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 didn’t 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 wouldn’t be able to exclude people who didn’t pay for the goods. Public goods are socially desirable and cannot be effectively provided in private markets because people who don’t pay can’t 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 aren’t 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.
- Have students work in groups to complete the chart. They may use items from the “brainstorming activity” or they can create additional items.
Students should report out from the groups with their charts.
Adapted from: “Public Goods and Services.” Old MacDonald to Uncle Sam, National Council on Economic Education, New York, 2000.
Decide whether each of the following is a public good or private good and explain your decision.
- National weather service
- Potato chips
- Fire protection
- National park
- Personal computer
- Mosquito control
- Fireworks display
Taking a Position on an Issue
- Talk about goods and services. Make a list of goods and services found in the community and record them on this chart:
- Now talk about goods and services that we all use which would be impractical for consumers to pay for individually. Add a third column to your chart and continue your brainstorming.
Goods Services Public Good/Service
- Have students look at their lists and then write a definition for each of the columns.
- Have students brainstorm some guidelines for determining what constitutes a “public good/service”. If they are having trouble, encourage them to think about:
- Things that individual and markets alone can not make because of cost and insufficient profit to make it worthwhile
- No or little incentive for producers or consumers to take action
- Consequences of government action when there is an unmet public need
Have students decide if the building of a park can be a private undertaking or a public service. Have them write a park proposal to support either option. Be sure they provide reasonable support for their response.
Problem Solving Using a Case Study
- Divide the class in half. Assign one group to be the local government and the other group to be a private business.
- Have each group do an analysis of the following project:
A city has a shortage of parking spaces in its downtown area. New businesses are moving to downtown. As a result, people are moving downtown to work and live. The city managers are trying to decide if it’s worthwhile for them to invest money and energy to build new parking lots and garages or if they should leave it to the individual investors in the private sector.
- Have each group make a case for either taking on the project of for letting the other group do the project. Be sure they consider such things as:
- Whether it is a public good demanding that the city take over the project
- The profitability of such a project making it worthwhile for a private company to take over the project
- Which would benefit the public the most and why
- Invite a public official and a contractor to visit the class on the day of the presentations and have them be the judge of who gets to build the garage.
Have students debate which is more effective – public or private development. Use chart paper to record the major points. Have each student use these notes to write a brief paragraph stating and supporting an individual position on the issue.