Externalities Public and Private goods

♦ private markets fail to provide public goods.

♦ Explain how public goods differ from private goods and why Classify goods and services on the basis of rivalry and excludability.

Nonrival

 when consumption is nonrival, good or service is jointly consumed by people without reducing the amount available to others.

Rival

 when consumption is rival, good or service is consumed by 1 person which reduces the amount available to others.

Excludability

 An excludable good or service is only provided to someone who pays for it

Nonexcludability



nonexcludable goods

or services, once produced, can be used even by people who do not pay for them.

Pure private goods

 products that are both rival and excludable are known as

pure private goods.

These goods can be profitably sold by private firms that will provide the product only to those who pay for it.

Pure public goods

 These are nonrival and nonexcludable. It is usually impossible for the market to work effectively under conditions where additional consumers can be satisfied without additional sales of the good and individuals can refuse to pay even if they consume the product.

Mixed Goods

 Neither pure private nor pure public goods, because they have one characteristic of each type of good. Some of these goods can be provided by private firms, but others are partly or entirely provided by government.

Mixed Goods

Nonrival but Excludable Rival but Nonexcludable

Problems with mixed goods

 In many cases, private firms will produce some of these products, but not the amount that reflects all the benefits and costs to consumers and producers.

Why do you think this is true?

Activity 1

Free riders

People who are able to enjoy a good once it is provided without having to pay for it.

Problem with Free riders

 Occur when the good is jointly consumed (nonrival) and nonexcludable (it is expensive or impossible to prevent nonpayers from enjoying the good).

Positive / Negative

 positive or negative spillovers to third parties, people or firms other than the producers and paying customers of the products. Relate this to the concept of nonexcludability

Characteristics

 characteristics of nonrivalry and nonexcludability can prevent private markets from achieving efficiency because the costs and benefits are not reported fully by some producers or consumers, or they spill over to individuals who are neither consumers nor producers.

What is the true benefit?

 Freeriders do not pay for the extra benefits they receive from consuming goods or services that provide spillover benefits. Because they understate their demand for the products, market prices for these goods and services will be too low and too little will be produced.

In your notes, give examples of the following: MIXED GOODS trait______________ trait______________ example______________ PURE PUBLIC GOODS trait______________ trait______________ example______________ MIXED GOODS trait______________ trait______________ example______________ PURE PRIVATE GOODS trait______________ trait______________ example______________