Public Goods

Essay

EC 11 Essay Words : 4545 Hemis :8 "Public Goods

HYPERLINK "javascript :parent .openDSC ,0 '842 " 1PUBLIC GOODS Introduction

Private markets do not provide some essential goods and services , such as national defense . Because national defense is so important to the nation 's existence , the government steps in and entirely funds and administers this product

Public goods differ from private goods in two key respects . First , a public good can be used by one person without reducing the amount available for others to use . This is known as shared consumption

. An example of a public good that has this characteristic is a spraying or fogging program to kill mosquitoes . The spraying reduces the number of mosquitoes for all of the people who live in an area , not just for one person or family . The opposite occurs in the consumption of private goods . When one person consumes a private good , other people cannot use the product . This is known as rival consumption . A good example of rival consumption is a hamburger . If someone else eats the sandwich , you cannot (Watts , Michael 2006

The second key characteristic of public goods is called the non- exclusion principle : It is not possible to prevent people from using a public good , regardless of whether they have paid for it . For example , a visitor to a town who does not pay taxes in that community will still benefit from the town 's mosquito-spraying program . With private goods like a hamburger , when you pay for the hamburger , you get to eat it or decide who does . Someone who does not pay does not get the hamburger

Because many people can benefit from the same pubic goods and share in their consumption , and because those who do not pay for these goods still get to use them , it is usually impossible to produce these goods in private markets . Or at least it is impossible to produce enough in private markets to reach the efficient level of output . That happens because some people will try to consume the goods without paying for them , and get a free ride from those who do pay . As a result , the government must usually take over the decision about how much of these products to produce . In some cases , the government actually produces the good in other cases it pays private firms to make these products

The classic example of a public good is national defense . It is not a rival consumption product , since protecting one person from an invading army or missile attack does not reduce the amount of protection provided to others in the country . The non-exclusion principle also applies to national defense . It is not possible to protect only the people who pay for national defense while letting bombs or bullets hit those who do not pay . Instead , the government imposes broad-based taxes to pay for national defense and other public goods

Adjusting for External Costs or Benefits

There are some private markets in which goods and services are produced...