Topic 6.3 Notes – Public and Private Goods

1. Rivalry and Excludability

Everything in this topic starts with two questions.

Is the good rival?

• Rival means one person’s use reduces what’s available for others.
  • If you eat a slice of pizza, no one else can eat that slice.
• Non-rival means your use does not reduce availability.
  • Your use of a streetlight doesn’t make it dimmer for others.

Is the good excludable?

• Excludable means non-payers can be prevented from using it.
  • Movie tickets, iPhones, private tutoring.
• Non-excludable means it’s difficult or impossible to prevent non-payers.
  • National defense, clean air, many public parks.

These two traits shape incentives. When goods are non-excludable or non-rival, private firms struggle to charge people, and that’s where market failure can happen.

2. The Four Types of Goods

Here’s the full breakdown:

Private Goods

Rival and excludable. Firms can charge consumers, so markets usually allocate them efficiently.

Public Goods

Non-rival and non-excludable. These create the biggest incentive problem.

Common Resources

Rival but non-excludable. Anyone can access them, but each use reduces supply.

Club Goods

Excludable but non-rival until congestion sets in. A toll road is non-rival when empty but becomes rival during rush hour.

Here’s the standard 2×2 visual you’ve probably seen in class. Notice how the columns separate excludable from non-excludable goods, and the rows separate rival from non-rival goods. Each quadrant matches one of the four categories in the table above.

Four types of goods by rivalry and excludability

3. The Free Rider Problem

The free rider problem happens with public goods.

Because they are non-excludable, people can benefit without paying. Since they are non-rival, one extra user costs almost nothing.

So what does a rational person do?
They understate their willingness to pay and hope others cover the cost.

If everyone does this:

• Firms can’t earn profit.
• The good is underproduced or not produced at all.
• This is a market failure.

Classic example: national defense. You cannot exclude someone from being defended. If funding depended on voluntary donations, many people would refuse to contribute.

Government solution:

• Taxation forces payment.
• The public sector (federal, state, local governments) provides the good.
• This solves the incentive problem.

Basic scientific research funded by the federal government is another real-world example because private firms cannot capture all the benefits.

4. The Tragedy of the Commons

Common resources are rival and non-excludable.

Each person thinks, “If I don’t use it, someone else will.”
So they consume more than is socially optimal.

Result:

• Overconsumption
• Resource depletion
• Inefficiency

This is the tragedy of the commons.

Examples:

• Overfishing in international waters
• Deforestation
• Air pollution

The difference from free riding is huge:

• Public goods → underproduction
• Common resources → overuse

Solutions:

• Assign property rights (privatization)
• Government regulation (fishing quotas)
• Tradable permits (like carbon markets)

On exams, they love giving a fishing or pollution scenario and asking you to identify which problem it is. If it’s depletion from overuse, think commons.

5. Efficient Provision of Public Goods

For any good, efficiency occurs where:

$$\text{MSB} = \text{MSC}$$

For public goods, the key twist is how we find marginal social benefit.

Because everyone consumes the same quantity, we add demand curves vertically.

Private goods use horizontal addition. Public goods use vertical addition.

The graph below shows two individual demand curves for a public good and their vertical sum. At a given quantity, you add each person’s willingness to pay to get the total marginal social benefit. The efficient quantity occurs where that vertically summed demand curve intersects the supply curve.

Vertical summation of demand for a public good

Governments sometimes also provide private goods, like public education. Education is technically rival and excludable, but governments provide it because of positive externalities and equity goals.