In economics, a public good is a good that is both non-excludable and
non-rivalrous in that individuals cannot be effectively excluded from use and
where use by one individual does not reduce availability to others. Some
examples of public goods include fresh air, knowledge, lighthouse, national
defence, flood control systems and street lighting. Public goods that are
available everywhere are sometimes referred as global public goods. As such the
overall value of public goods is obtained by summing the value that each
individual receives for a given quantity. The non-rivalrous nature of public
goods consumption makes the derivation of the market demand different from that
of private goods. The difference is horizontal versus vertical. Many public
goods may at times be subject to excessive use affecting all users such as air
pollution and traffic congestion. Public goods are often closely related to the
‘free-rider’ which meant people not paying for the good may continue to access
it. Besides that, the goods may be under-produced, overused or degraded.
In economics, private good is defined as “an item that yields positive
benefits to people” that is excludable which meant its owner can exercise
private property rights, preventing those who have not paid for it from using
the good or consuming its benefits. Besides that, rivalrous meant consumption
by one necessarily prevents that of another. A private good is scarce in
economic resource and can cause competition for it. The market demand curve for
a private good is a horizontal summation of individual demand curves. Private
goods are less likely to have the free rider problem compare to the public
goods. Assuming a private good is valued positively by everyone, the efficiency
of obtaining the good is obstructed by its rivalry which is simultaneous
consumption of a rivalrous good is theoretically impossible. Besides that, the
feasibility of obtaining the good is made difficult by its excludability meant
that people have to pay for it to enjoy its benefits.
As mentioned earlier, the market demand for private goods is derived
through the horizontal summation of individual demand curves. Furthermore, the
market demand for public goods is derived through the vertical summation of
individual demand curves. For private goods, the market demand will answer the
question “What is the total quantity that buyers would be willing to purchase
at given price?” while for public goods, the market demand will answer this
question “what is the total value or benefit generated from consuming a given
quantity?”
Private Goods Demand
The Market Demand for Private Goods
To see the difference between private and public goods, first consider
the market demand for private goods. The primary focus of the market demand for
private goods is on the price that the buyers pay. The total market demand is
derived by adding up or summing the quantity demanded by every buyer at a given
price. For example, the market demand for stuffed animals. This particular
market contains only two buyers, Muizz and Azim. Suppose that Muizz is willing
and able to purchase 2 stuffed animals at a $1 price and Azim is willing and
able to purchase 6 stuffed animals at this price. In this case, the total
market demand at the $1 price is 8 stuffed animals which is 2 + 6. The market
demand curve is then derived by identifying the quantities that these two
buyers would be willing and able to purchase at different prices.
The market demand is the horizontal summation of the individual demand
curves of Muizz and Azim. The quantities are horizontally summed for a given
price. The resulting red demand curve is the market demand for stuffed animal.
Public Good Demand
The Market Demand for Public Goods
Non-rivalrous consumption makes the derivation of the demand for public
goods a different story. Everyone can enjoy the benefits of a public good
simultaneously. The consumption by one person does not prevent the consumption
by another. As such, the value society receives from a public good is the sum
of the value received by all who enjoy the benefits. This means that the demand
for public goods is based on the vertical summation of individual demand
curves.
For example let's return to our two buyers, Muizz and Azim. However, in
this case they are consuming a public good, such as national defence. The focus
of attention is now on the price each buyer would be willing to pay for a given
quantity of the good let’s say 2 fighter jets. Suppose that Muizz is willing
and able to pay $1 for a given level of defence and Azim is willing and able to
pay $3 for this level. The total market demand is the sum of the prices that
each is willing to pay, which is $4 ($1 + $3). The market demand curve is then
derived by summing the prices that these two buyers would be willing and able
to pay for different quantities. The market demand curve is the vertical
summation of the individual demand curves of Muizz and Azim. The prices are
vertically summed for a given quantity. This new red demand curve labeled D is
now the market demand for the public good.
The conclusion of these private and public goods is
that the difference is subtle, but key to an understanding of public goods.
Efficiency dictates that the extra benefit generated by a good is equal to the
extra opportunity cost of production which meant the marginal benefit generated
from the production of one more unit of the good is equal to the marginal cost of
production. Furthermore, because private goods are rivalrous in consumption,
the production of one more unit of the good can be consumed only by one person.
Efficiency is then achieved when the extra benefit received by that one person
is equal to the extra cost of production.
In other hand, the story is a
different for public goods that are non-rivalrous in consumption. This is because
public goods are consumed by everyone simultaneously and the extra benefit
derived from consumption is the extra benefit by everyone combined. This can be
obtained by summing the extra benefit that each receives, which meant by
summing the price each is willing to pay.
Posted by Muhammad Faizzullah
Perfect！
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