Public Versus Private Goods

Government regulation and antitrust policy are often used to protect consumers, workers, and the environment; to discourage and regulate monopoly; and to overcome problems posed by externalities such as pollution. Another important function of government is to provide goods and services that cannot be provided and allocated in optimal quantities by the private sector.

If the consumption of a product by one individual does not reduce the amount available for others, the product is a public good. Once public goods are provided for a single consumer, they become available to all consumers at no additional marginal cost. Classic examples of public goods include national defense and police and fire protection. Over-the-air radio and TV broadcasts are typical examples of public goods provided by the private sector in the United States, even though radio and TV programming is provided by the public sector in many foreign countries. By way of contrast, a private good is one where consumption by one individual precludes or limits consumption by others. Food, clothing, and shelter are all private goods because the number of potential consumers of a fixed amount is strictly limited. The distinguishing characteristic of public goods is that they share the attribute of nonrival consumption. In the case of public goods, use by certain individuals does not reduce availability for others. For example, when an individual watches a network broadcast of a popular TV program such as The Simpsons, this does not interfere with the enjoyment of that same TV program by others. In contrast, if an individual consumes a 12-ounce can of Diet Coke, this same can of soda is not available for others to consume.

The concept of nonrival consumption must be distinguished from the nonexclusion concept. A good or service is characterized as nonexclusionary if it is impossible or prohibitively expensive to confine the benefits of consumption to paying customers. Although nonrival consumption and nonexclusion often go hand-in-hand, theory defines public goods only in terms of the nonrival consumption concept. Because national defense and network TV broadcasts can be enjoyed equally by more than one consumer at the same point in time, they are both public goods. National defense also exhibits the characteristic of nonexclusion because when it is provided for by taxpayers, nontax-paying citizens cannot be excluded from also enjoying the benefits of a strong national defense. On the other hand, the enjoyment of TV broadcasts can be made exclusive by restricting viewership, as is true with cable TV customers. Public goods that are nonrival in consumption would not be provided in the optimal amount by the private sector.

Because public goods can be enjoyed by more than one consumer at the same point in time, the aggregate or total demand for a public good is determined through the vertical summation of the demand curves of all consuming individuals. As shown in Figure 16.1, DA is the demand curve of consumer A, and DB is the demand curve of consumer B for public good Y. If consumers A and B are the only two individuals in the market, the aggregate demand curve for public good Y, Dt is obtained by the vertical summation of DA and DB. This contrasts with the market demand curve for any private good, which is determined by the horizontal summation of individual demand curves. Given market supply curve SY for public good Y in Figure 16.1, the optimal amount of Y is QY units per time period given by the intersection of DT and SY at point T. At point T, the sum of marginal benefits enjoyed by both consumers equals the marginal social cost of producing QY units of the public good. That is, PT = PA + PB = MCY.

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