Who pays for national defense? Public health research? What about movie tickets? Movie tickets are clearly the odd one out, but how does the economy decide who should bear the cost of certain goods and services? The concept of public and private goods helps explain why governments use taxes to collectively fund some goods/services but not others.
Eager to learn more? Read the explanation below to find the answers to these burning questions!
Meaning of public goods
In economics, the term public goods has a specific meaning. The two key characteristics of public goods are non-excludable and non-rivalrous. Only goods that have both characteristics are considered public goods.
Public goods are goods or services that are non-excludable and non-rivalrous.
Characteristics of public goods
Figure 1. Characteristics of Public Goods, StudySmarter Original
Many public goods are provided by the government and funded through taxes. Let's break down what each of the two characteristics entails.
Non-excludable
Non-excludable means that the consumer cannot be excluded from a good/service, even if they don't pay. An example of this is clear air. It is impossible to stop someone from breathing clean air, even if they did not contribute to the process of maintaining clean air. Another example is the national defense. Defense is provided to everyone, regardless of how much taxes they pay or if they even want to be protected. On the other hand, a car is excludable. The seller of the car can prevent someone from driving away with it if they don’t pay.
Non-rivalrous
Non-rivalrous means that when one person is using a good/service, it does not diminish the amount available to others. Public parks are an example of nonrivalrous goods. If one person uses a public park, it does not reduce the availability for others to use it (assuming enough space, of course). In contrast, a cup of coffee is a rivalrous good. If one person is drinking a cup of coffee, it means another person cannot. This is because coffee is a scarce good—there is a gap between the demand for coffee and the availability of coffee.
Parks are public goods
Is street lighting a public good?
Street lighting can be found on many roads and highways. Drivers do not pay every time they want to use street lighting, but does that make it a public good?
First, let's analyze if street lighting is excludable or non-excludable. Street lighting is usually provided by the government and paid for by taxes. However, drivers from other states and countries who do not pay taxes are free to use street lighting. Once the street lighting has been installed, drivers cannot be excluded from using the lighting. Therefore, street lighting is non-excludable.
Next, let's look at if street lighting is rivalrous or non-rivalrous. Street lighting can be used by multiple drivers at once. Thus, it would be considered a non-rivalrous good as the use of street lighting by some does not diminish its availability to others.
Street lighting is both non-excludable and non-rivalrous, which makes it a public good!
Meaning of private goods
In economics, private goods are goods that are excludable and rivalrous. Many of the everyday items that people purchase are considered private goods. Typically, there is a competition to obtain private goods.
Private goods are goods or services that are excludable and rivalrous.
Characteristics of private goods
Let's break down what each of the two characteristics means.
Excludable
Excludable refers to a good whose ownership or access can be restricted. Usually, private goods are restricted to those who purchase the goods. For example, a phone is an excludable good because, in order to use and own a phone, it must first be bought. A pizza is another example of an excludable good. Only someone who pays for the pizza is able to eat it. An example of a nonexcludable good is healthcare research. It is not feasible to exclude specific people from the benefits of healthcare research, even if they do not contribute to or fund the research.
Rivalrous
In addition to being excludable, private goods are rivalrous. For a good to be rivalrous, if one person is using it, it diminishes the amount available to another person. An example of a rivalrous good is an airplane ticket. An airplane ticket only allows one person to fly. Thus, using an airplane ticket excludes others from using the same ticket. Note that an airplane ticket is also excludable because the use of the airplane ticket is limited to the person who purchased it. Thus, an airplane ticket would be considered a private good because it is both excludable and rivalrous. An example of a nonrivalrous good is public radio. One person listening to the radio does not prevent others from using it.
Airplane and train tickets are private goods
Examples of public and private goods
Public and private goods are everywhere. Nearly everyone relies on at least some public goods. Examples of public goods include:
- National defense
- Healthcare research
- Police departments
- Fire departments
- Public parks
These examples would be considered public goods because they are non-excludable, meaning that anyone can access and use them, as well as non-rivalrous, meaning that one person using them limits their availability to others.
Similarly, private goods are abundant in everyday life. People purchase and interact with private goods on a constant basis. Some examples of private goods include:
- Train tickets
- Lunch at a restaurant
- Taxi rides
- A cellphone
These examples would be considered private goods because they are excludable, meaning that access and use are restricted, as well as rivalrous, meaning that one person using them, their availability is limited.
Table 1 below gives examples of various goods based on excludability and rivalry criteria:
| Examples of public and private goods |
| Rival | Non-rival |
| Excludable | FoodClothesTrain tickets | EbookMusic streaming subscriptionMovies on demand |
| Non-excludable | LandWaterCoal | Public parkNational defenseStreet lighting |
Table 1. Examples of various goods based on excludability and rivalry criteria
Public goods and positive externalities
Many public goods are services provided by the government and paid for by taxes. This is because public goods often provide benefits for everyone, even if they do not directly utilize the service. This is known as a positive externality - a good that provides benefits to people not involved in the transaction. Positive externalities are a major reason why governments spend money to provide public goods.
An example of a public good with a positive externality is the fire department. If the fire department puts out a fire on someone’s house, that person clearly benefits. However, the neighbors also benefit because putting out the fire makes it less likely that the fire would spread. Thus, the neighbors received a benefit without directly utilizing the service.
Free-rider problem
While public goods and positive externalities sound great, there is a dilemma when it comes to charging for them. The nonexcludable and nonrivalrous nature of public goods creates incentives for individuals to consume goods without paying for them. A classic example of the free-rider problem is lighthouses. A lighthouse would be considered a public good because it is nonexcludable and nonrivalrous. A private company operating a lighthouse would find it very difficult to charge for their service because any ship, regardless of whether that ship paid the lighthouse, would be able to see the light. It is not possible for the lighthouse to show its light to some ships and not others. As a result, the incentive for individual ships is to not pay and “free-ride” off of ships that do pay.
Another example of the free-rider problem is the national defense. The military cannot pick and choose who they protect. If a country is under attack, it would be infeasible for the government to only defend citizens who paid for defense. Thus, governments face a dilemma when deciding how to fund national defense. The solution that most governments decide on is funding through taxation. With taxes, everyone is contributing to the national defense. However, taxes do not completely eliminate the free-rider problem because even people who do not pay taxes will benefit from the national defense.
Public and private goods - Key takeaways
Excludable goods are goods whose access or ownership can be restricted. Nonexcludable goods are the opposite—they are goods whose use cannot be restricted.
A rival good is a good whose availability is limited when one person uses it. Nonrivalrous goods are the opposite—one person using the good does not limit its availability.
Public goods are nonexcludable and nonrivalrous. This means that access to the good cannot be restricted and the availability of the good is not affected by one or more consumers using it.
Examples of public goods include:
National defense
Healthcare research
Public parks
Private goods are excludable and rivalrous. This means that access to the good can be restricted and the availability of the good is limited.
Examples of private goods include:
Clothes
Food
Airplane tickets
A positive externality is a benefit conferred to someone without compensation or their involvement. Many public goods have positive externalities which is why governments fund them.
Public goods suffer from the free-rider problem–the incentive to consume a good without paying for it.
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