Characteristics of Public Goods

  • Public goods are not divisible and not subject to the principle of exclusion. Goods is divisible when it can be split into units and sold only to consumers who can and are prepared to pay the appropriate price for them.

It is subject to exclusion principle if it is priced in the market and those who cannot and do not pay for it are excluded from its use.

These two principles go together and are applicable to private goods in that it can be priced in the market and only those who pay its stipulated price can be allowed to use it.  

On the other hand, pure public goods are such that it is not possible to prevent some members of the society from its consumption even when they are not prepared to pay for it.

  • Public goods have externalities. Externality refers to the economic effects which flow from the production or use of the goods to other economic units.

Such effects may be referred to as the spill-over, third party or neighborhood effects. An externality may be an economic gain or loss.

A “gain” is benefit which a social overhead like a road would bring to an area and an example of a loss is the damaging noise suffered by the people living near an airport.

The existence of externalities causes divergence between the internal (private) and Social Marginal Cost and Benefits of the goods in question.

Example, the noise of the aircraft is a cost to the society and not to the airport authority.

Similarly, the benefits of the road cited above are social benefits and not of those of the authorities that constructed it.

Externalities are of two types: Market externalities effects and Non-market external effects. They are said to be market external effects when they can be priced in the market with reference to the demand and supply behavior.

For instance, it may be possible through the market mechanism to protect individual economic units from the economic loss resulting from public goods.

They are non-market external effects when it is not possible to price them through the market mechanism.

Example, it is highly difficult to apportion the economic gain of a new road among the beneficiaries.

Public goods that have non-market effects should be preferably left in the hands of public authorities since they can decide about the creation or location of industries producing them without reference to their commercial profitability.

From this point of view, public goods which have market external effects may be left in the hands of the private sectors.

However, they may still be better in the hands of the public sector owing to their indivisibility. By contrast private goods are not supposed to have any externalities. In this case there would be no difference between the private and the social marginal cost of its supply.

Ordinarily, the provision of private goods should be left to the private sector. But on account of certain conditions such as cost conditions, resource availability, social and political philosophy etc, the public sector may not only participate but may even exercise some monopoly.

  • Public goods may have zero or near zero marginal cost. This implies that an additional member of the society can benefit from it, without appreciably adding to its total cost.

In other words, we can say that the use of public goods by one more member of the society does not reduce its availability to others.

A good example is the tuning on of one’s radio set. This principle, however applies to a limited extent. A large number of members of the society may not be able to enjoy the benefit of public goods without adding to the cost of its supply.

Example is the extension of water supply to areas where it is not presently would mean more pipes, labour etc and consequently more costs.

  • Public goods are subject to law of decreasing average costs. Being lumpy, it would be subject to economies of scale.

If it is provided in small units, the average cost is likely to be much more. Private goods may, but need not be subjected to these principles.

The application of decreasing average cost is however, limited. Take the services of the Nigerian Postal Services (NIPOST) and the Power Holding Company of Nigeria PLC (PHCN) for example.

Social Wants and Merit Wants

Public goods are easily classified into social wants and merit wants.

Social Wants

These are those wants which are satisfied by services that must be consumed in equal amount by all.

The goods and services meant for satisfying these wants are neither excludable nor rivalrous. These want may not be satisfied through the free market pricing mechanism.

But they are provided by the government whether an individual pays for them or not. Examples are recreation parks, defense, education, judiciary etc.

Merit Wants

They are those wants which are satisfied by the government on merit through the general budget.

When the government feels that the people are not consuming enough of certain goods and services, it provides them free or subsidies them. Such goods are called Merit Goods.

Thus merit goods are goods which the society, operating through the government, feels the individuals should be encouraged to consume. Such goods includes: housing, education, health etc.

The government may also seek to protect individuals through law prohibiting the use of harmful drugs (cocaine, heroin, marijuana, etc) this is likely to interfere with the free choice of consumers.

Difference between Social Wants and Merit Wants

The basic difference between social wants and merit wants includes the following:

  • The satisfaction of social wants provides benefit to all while the satisfaction of merit want involves interference with consumer preference
  • Social wants are subject to the conditions of non rivalry and non excludability but merit wants may or may not be subject to these conditions.
  • Merit wants may have a substantial element of social wants. The provision of merit wants will confer immediate benefits on those who are in immediate need of, say, free education and health care but the community as a whole also benefits because it becomes healthier and more educated.

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