Pure Private Versus Pure Public Goods And The Mixed Cases:

1851 words - 8 pages

MBA 604
D. Opp

Pure Private versus Pure Public Goods and the Mixed Cases:

Economists categorize goods and services with respect to two basic characteristics:
1) the degree or rivalry or absence of involuntary sharing (the amount of unavoidable joint consumption), and
2) the ability or cost of excluding others from consumption (the ease with which sharing
can be prevented).

A complete taxonomy, which covers all goods and services, based upon these rivalry and exclusion characteristics, may be put in the following table:

Rivalry Characteristic

Full Rivalry ...view middle of the document...

Pure public goods are the opposite case where both rivalry and excludability are low, so that governments provision is the most efficient through the power of taxation to fund production, and letting everyone share equally in consumption, so that no competition is needed. Ideally, sufficient guidance is provided by competition in the electoral process by the preferences of the median voter, and in the political arena between competing interests for different public goods and their level of provision. In these two pure cases, efficiency simply requires achieving a proper division of labor between the private and public sectors based on the principle of comparative advantage, along with some clear rules of law about property rights, which distinguishes the private from the public domain.

The economic definition of a pure public good, once its supply is determined, is one where the marginal cost of adding another consumer is zero, as there is no crowding or rivalry. It should be noted that in the case of pure private goods, each individual chooses the unique quantity she wishes to consume, where everyone pays the same competitive market price, more-or-less, per unit. In the case of the public good, each individual consumes the same amount for a fixed quantity supplied, and each pays a separate tax-price for provision as determined by the particular provisions of the tax code. This bears thinking about in order to understand the difference clearly. On one hand, each individual gets to choose independently how much of the private goods she wants to consume, and everyone pays the same price. On the other hand, each individual consumes the same amount of the public good, the total amount that is supplied and available to everyone, but pays a different tax-price for that joint consumption.

Conflicts over the optimal quantities supplied of public goods, or the relative size of the government sector in the aggregate, arise mainly because of the rivalry-exclusion properties. While each individual consumes the same amount of a public good, their preferences for the optimal amount will differ, which naturally leads to political disagreements about provision with joint consumption. Under an efficient division of labor, public or government-provided goods fall into three basic categories: 1) social welfare programs, which basically redistribute income, 2) human and physical capital enhancement, which tend to be redistributive, but which also increase overall productivity, the benefits of which may be considered a public good, and 3) pure public goods, which are considered “infrastructure” investments that are either physical (e.g., roads), or institutional (e.g., impartial courts). While the first two achieve voter-mandated social and economic objectives, the benefits are largely captured privately, and there are likely to be very different individual preferences regarding their optimal amounts. The third, while non-redistributive,...

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