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Summary Theory of Private Vs. Public Goods AND Principle of Maximum Social
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THEORY OF PUBLIC and PRIVATE GOODSWhat Are Public Goods?
Believe it or not, we receive free goods and services every day! We're just so accustomed to them that
we don't often notice. For example, when you relax in a cool cafe on a hot summer day, you are
receiving the benefit of air conditioning that you are not paying for. This is an example of a public good.
Public goods are products or services we all use. Because we all use them, each of us cannot be charged
individually for them. The café you enjoy couldn't really put a number on how much air conditioning you
enjoyed during your visit, so the owners cannot fairly charge you for it.
Public goods are typically financed by business owners or the government through tax revenues.
When a public good is consumed, the amount left for others to consume is not reduced, and it cannot be
withheld from those who are unable to pay for it. For example, when you enjoy the air conditioning in a
café, there is not less air conditioning for others to enjoy. There is no competition to provide public goods
because they are supplied to everyone. The police force is a good example of this. When we feel unsafe
because we have heard strange noises late at night, we do not select which company to call. We simply
call the police. Because there is no competition among producers and providers for public goods, they
are referred to as non-rivalrous and non-excludable. Non-excludable means that no one can be denied
the service. For example, anyone who feels unsafe can call the police.
Economists define a public good as a good having one or both of the characteristics of non-excludability
and jointness in consumption. Non-excludability means that it is difficult to keep people from
consuming the good once it has been produced, and jointness in consumption means that once it is
produced for one person, additional consumers can consume at no additional cost. Goods that are joint
in consumption are also called collective-consumption goods or nonrival consumption goods, and the
terms are used interchangeably here. The most precise technical definition of a public good, and the
definition that is most often referred to by economists, is Samuelson's definition, which says that a
public good is a good that, once produced for some consumers, can be consumed by additional
consumers at no additional cost. This is the jointness in consumption referred to above. While this is
the standard economist's definition of a public good, economists have taken some liberty with the
language in formulating the definition. While economists give it a formal technical definition, in verbal
analysis public good" is often used in an ambiguous manner.
A dictionary defines public as "of, related to, or serving the community." For most people who hear it,
including economists, the term conjures the image of a good available for all citizens to consume, and
common examples used by economists, such as national defense and highways, are suggestive of the
idea that a public good is a good produced by government, and generally available for the benefit of
its citizens. Indeed, this more commonsense definition of public good - was generally accepted by
economists until Samuelson made the definition more 3 precise, and at the same time altered its
meaning. Thus, on the one hand, professional economists define the term public good as something with
the technical characteristics of jointness in consumption and non-excludability.
,The Theory
The theory of public goods was postulated by Paul Samuelson (1954). It states that goods that are
collectively consumed are non-rival and non-excludable. He also referred to the theory as The Pure
Theory of Public Expenditure. The theory highlights what Samuelson referred to as free riders--those
who pretend to have less than they do in order to participate in the collective consumption without
contributing to its maintenance. An example of the free rider aspect of the theory would be the
entrepreneur who is charging $10 for customers to watch the July 4th fireworks. Rather than pay, many
free riders allow others to pay, while they enjoy the show from their windows or yards or from a nearby
public area.
MODEL REPRESENTING PUBLIC Vs. GOOD THEORY :-
Common Property
These goods are highly rivalrous but the excludability is low in their consumption. Examples of common
property is the urban roads, timber, coal, or national health.
Private Good
DEFINITION of 'Private Good' A product that must be purchased in
order to be consumed, and whose consumption by one individual
prevents another individual from consuming it. Economists refer to
private goods as "rivalrous" and "excludable".
High excludability and high rivalry in consumption are the characteristics of private goods.
Examples of these goods include food, clothing, cars, private water pipeline, rail transport,
power distribution, etc.
Private goods are rivalrous and excludable.
, Public Good
These goods are non-excludable and non-rivalrous. Examples of these goods include flood
control infrastructure, air, national defense, or rural roads.
Club Good
Club goods (also artificially scarce goods) are a type of good in
economics, sometimes classified as a subtype of public goods that are
excludable but non-rivalrous, at least until reaching a point where
congestion occurs.
The characteristics of these goods include high excludability but low rivalry in their use.
Examples of these goods are cinema, private parks, satellite TV, etc.
Summary
Four Types of Goods
Private goods: Private goods are excludable and rival. Examples of private goods include food, clothes,
and flowers. ...
Common goods: Common goods are non-excludable and rival. ...
Club goods: Club goods are excludable but non-rival. ...
Public goods: Public goods are non-excludable and non-rival.
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