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Differences Between Private Goods and Public Goods

Use examples to illustrate the difference between private goods and public goods and explain why only private goods will be supplied in a free market economy. [8]

Category:

Market Structures and Competition

[CIE AS level May 2016]

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Answer

Tip: Make sure that you have a firm understanding of the characteristics of public goods and private goods as this is essential to be able to explain the ‘free-rider’ issue.


Step ➊ : Define 'private goods' and 'public goods' in the introduction. (Knowledge and understanding)

Private goods are very different from public goods. Private goods are goods bought and consumed by individual consumers or firms for their own benefit. Examples include food, clothes and textbooks. A public good is a product that one individual can consume without reducing its availability to others and from which no one is deprived. Examples of public goods include national defence, sewer systems, and lighthouses. As those examples reveal, public goods are almost always publicly financed and will not be supplied by the free market.


Step ➋ : Explain the differences between public goods and private goods.

There are several differences between public goods and private goods.

2.1 Private goods are excludable whereas public goods are non-excludable.

It is possible to exclude or prevent some people from using a private good. This is normally done by charging a price. If the price is not acceptable, then that good will not be consumed. Once one person has purchased a private good, it cannot be consumed by others. Public goods are non-excludable: once the good has been provided for one consumer, stopping all other consumers from benefitting from the good is impossible.

2.2 Private goods are rival while public goods are non-rival.

There is rivalry for private goods. The consumption of a private good by one person reduces the availability for others. For example, when we purchase food, clothes or books then this means that fewer of these goods are available for purchase by others. Public goods are non-rival. As more and more people consume the good, the benefit to those already consuming the product will not be diminished. Streetlights for example.


Step ➌: Explain why public goods cannot be provided in a free market. (application)

The free market fails to provide public goods such as defence or street lightning. This is because they would not be able to supply them for profit due to their characteristics - non-excludability and non-rivalry. This is called the free-rider problem. Because public goods are non-excludable, it is costly or impossible for one user to prevent others from it. For example, if a fisherman provides a lighthouse for his own benefit, all other fishermen in the area will benefit equally from the lighthouse. Their advantage, however, is that they did not have to pay for this lighthouse. Thus public goods are also non rival , which means that the consumption by one consumer does not restrict consumption by other consumers. These are the reasons why the free market cannot provide public goods.


Step ➍ : To conclude.

There are several differences between public goods and private goods. Private goods are excludable whereas public goods are non-excludable. Private goods are rival while public goods are non rival. Due to their charactheristics of non excludability and non rivalry, the free market would not be able to supply public goods for profit.


♕ Marking scheme

For knowledge and understanding of the characteristics of private goods with examples and application to show why they will be supplied in a free economy. (4)


♕ Examiner’s report

Most candidates made reference to the qualities of excludability and rivalry in consumption that are essential in establishing the distinction between private and public goods. There was considerable variation however in the extent to which these were fully understood. Many candidates clearly did not understand these concepts and provided a confused explanation. This lack of understanding then undermined their ability to score well on the second part of the question. Without a firm understanding of non-excludability it is unlikely that candidates would be able to explain the ‘freerider’ issue. The confusion was often emphasised in the examples of private and public provided. Many candidates for example, stated that non-excludability was a distinguishing feature of public goods and then suggested that health care was an example of such a good. Confused responses scored poorly.

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