Economics “Ask the Instructor” Clip 55 Transcript



Economics “Ask the Instructor” Clip 55 Transcript

Does the term public good refer to goods and services provided by the public sector?

No, but it is understandable that most people assume that any good provided by government is a public good. After all, we speak of the “public” library, “public” schools, and “public” highways. However, in the specialized field of economics, goods are divided into two categories: public and private. The distinction is based on the characteristics of the goods, not which sector, public or private, supplies them.

Private goods and services are goods that are divisible, consumed individually, and by their nature can be denied to persons who are unable or unwilling to pay for them. Examples include pizza (and food in general), health care, housing, and most things that you and I consume.

Public goods, in contrast, are goods and services that are consumed jointly, available to everyone if they are available to anyone, and by their nature are difficult if not impossible to deny to persons who are unable or unwilling to pay.

What about libraries and education? Even though largely provided by governments, education and libraries provide services that have the attributes of private goods. The benefits are divisible, and it is possible to exclude persons who will not pay. But libraries and schools do not usually exclude anyone. The issue is not does the provider choose to exclude; the issue is could the provider exclude. Clearly, a public library could exclude people from checking out books, reading magazines, or receiving answers to reference question unless they paid a fee. Keep in mind that your favorite movie rental is essentially a library and it does in fact exclude people from checking out movies unless they first pay. Similarly, public schools could exclude students whose parents have not paid a price. The fact that public schools choose not to charge tuition does not change the fact that they could exclude on the basis of price. We conclude that education, whether provided by public or private schools, is essentially a private good.

You will reach a similar conclusion when you apply the same two characteristics –excludability and divisibility of benefits –to health care and highways. Thus, almost all goods have private good characteristics, but there are a few exceptions.

National defense is a good example of a public good. It fits the public good criteria: Benefits are jointly consumed; if it is available to me then it’s available to you; and it would be impossible to exclude anyone from the benefits while still providing the good to others. If we are to have an adequate quantity of a public good, it is necessary that government provide it. The reason is the incentive for consumers of a public good to refuse to pay, knowing that they cannot be excluded from the benefits. If most people take the attitude of a “free-rider,” provision by the private sector will not be profitable and the good will therefore not be provided.

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