INTRODUCTION
Public finance may be defined as a
field of study in economics concerned with the economic behaviour of
government. It is an inquiry into the facts, techniques, principles, theories,
rules and policies shaping, directing, influencing, and governing the use of
scarce resources of government spending, taxing, burrowing and managing the
public debt, since these are the operations of government operating to the use
of scarce resources (sharp and sliger, 1970: 5-6)
Musgrave (1959) the theory of public
finances, is the study in public economy, the complex of problems that centres
around the revenue expenditure process of government, is traditionally
preferred to as public finance.
CLARIFICATION OF TERM
According
to Benson (1990), A private good is defined as "an item that yields
positive benefits to people “that is excludable, i.e. its owners can exercise private property rights,
preventing those who have not paid for it from using the good or consuming its
benefits; and rivalries, i.e. consumption by one
necessarily prevents that of another. A private good, as an economic resource
is scarce, which can cause competition for
it. The market demand curve for a private good is a horizontal summation of
individual demand curves.
Unlike public goods, private
goods are less likely to have the free rider problem. Assuming a private good is
valued positively by everyone, the efficiency of obtaining the good is
obstructed by its rivalry, that is simultaneous
consumption of a rivalries good is theoretically impossible; the feasibility of
obtaining the good is made difficult by its excludability, that is
people have to pay for it to enjoy its benefits.
(Cowen, 1992) A
public good is a good that is both non-excludable and non-rivalries in
those individuals cannot be effectively excluded from use and where use by one
individual does not reduce availability to others. Examples of public goods
include fresh air, knowledge, lighthouses, national defence, flood control
systems and street lighting. Public goods that are available everywhere are
sometimes referred to as global public goods. (Buchanan;1967)
FEATURES
OF PRIVATE GOODS
Excludability:
Consumers of private goods can be excluded
from consuming the product by the seller if they are not willing or able to pay for it. For example a ticket to the theatre or a meal
in a restaurant is clearly a private good. Another example is the increasing
use of “pay-per-view” as a means
of extracting payment from people wanting to watch exclusive coverage of
sporting events on television or the payment required to travel on a toll-road
or toll-bridge. Another example of a private good is the use of subscription-based services on the
internet. Some newspapers provide the bulk of their news stories on the
internet as a “quasi public good” such
as The Guardian www.guardian.co.uk.
Rivalry: With a
private good, one person's consumption of a product reduces the amount left for
others to consume and benefit from - because scarce resources are used up in
producing and supplying the good or service. If you order and then enjoy a
pizza from Pizza Hut, that pizza is no longer available to someone else.
Likewise driving your car on a road uses up road space that is no longer
available at that time to another motorist. The greater the volume of traffic
on the roads, the higher the likelihood of traffic congestion which has the
effect of reducing the average speed and increasing the average journey time
for each road user.
Rejectability: Private
goods and services can be rejected - if you don't like the soup on the college
or school menu, you can use your money to buy something else! You can choose
not to travel on Virgin Rail on a journey to the North West and go instead by
coach, or you can choose not to buy a season ticket for your local soccer club
and instead use the money to finance a subscription to a local health club. All
private goods and services can be rejected by the final consumer should their tastes and preferences change. (Klein,
1990)
Example of a private good
An
example of the private good is bread: bread
eaten by a given person cannot be consumed by another (rivalry), and it is easy
for a baker to refuse to trade a loaf (exclusive)
FEATURES OF PUBLIC GOODS
As one might expect, the
characteristics of pure public goods are the opposite of private goods:
Non-excludability: The
benefits derived from the provision of pure public goods cannot be confined to
only those who have actually paid for it. In this sense, non-payers can
enjoy the benefits of consumption at no financial cost to themselves – this is
known as the “free-rider” problem and it means that people have a temptation
to consume without paying!
Non-rival consumption:
Consumption of a public good by one person does not reduce the availability of
a good to everyone else – therefore we all consume the same amount of public
goods even though our tastes and preferences for these goods (and therefore our
valuation of the benefit we derive from them) might differ
Examples of Public Goods There are
relatively few examples of pure public goods. Examples of public goods include
flood control systems, some of the broadcasting services provided by the BBC,
public water supplies, street lighting for roads and motorways, lighthouse
protection for ships and also national defence services, defence,
public fireworks, lighthouses, clean air and other environmental goods, and information
goods, such as software development, authorship, and invention. Some goods
(such as orphan drugs) require special governmental incentives to be produced,
but can't be classified as public goods since they don't fulfil the above
requirements (Non-excludable and non-rivalries.) Law enforcement, streets,
libraries, museums, and education are commonly misclassified as public goods,
but they are technically classified in economic terms as quasi-public goods
because excludability is possible, but they do still fit some of the
characteristics of public goods.
COMPARATIVE ANALYSIS Many
public goods may at times be subject to excessive use resulting in negative
externalities affecting all users; for example air pollution and traffic
congestion. Public goods problems are often closely related to the
"free-rider" problem, in which people not paying for the good may
continue to access it, or the tragedy of the commons, where consumption of a
shared resource by individuals acting in their individual and immediate
self-interest diminishes or even destroys the original resource. Thus, the good
may be under-produced, overused or degraded. Public goods may also become
subject to restrictions on access and may then be considered to be club goods
or private goods; exclusion mechanisms include copyright, patents, congestion
pricing, and pay television. A public good is indivisible and principle of
exclusion does not apply to it. Consequently, there is a risk of beneficiaries
not paying for it voluntarily, for example, in the case of defence; the service
would not be affected by one person not paying for it. Which means very few or
even none may pay for it voluntarily hoping that through the contributions and
efforts of others the supply of service will be maintained. Public goods are
indivisible goods whose benefits cannot be priced, and therefore, to which the
principle of exclusion does not apply. The main criterion of indivisibility is
that the good should be equally available to all members of the society or a
section thereof irrespective of their ability or willingness to pay for it. The
financing of the concerned activity has to be through public expenditure and
not through market pricing. This implies that public goods must be in the hands
of the public sector only. (Cowen, 2003)
Public good
marginal cost is zero or close to zero. It means that an additional member of
the society can be benefited by its use without appreciably adding to its total
cost. The use of public good by one more member of a society does not reduce
its availability to the others.
Public
goods are characterized by the existence of externalities, that is, economic
effects which flow from their production or use to other parties or economic
units. Such economic effects may also be called spill over effects,
neighbourhood effects or third party effects. Public goods are subject to the
economies of scale. If the public good is provided in small units, then the
average cost is likely to be much more, when it comes to providing and pricing
the goods, the government divides its activities into various categories. Some
of the public goods like defence, law and order are not subject to the
principle of exclusion. Every member of the society enjoys the benefit of these
goods in question in equal amount and their financing is done budgetary
provision. To provide an efficient level of a public good, the government must
first determine the populations’ marginal willingness to pay for it.
Private
goods are completely divisible and to them the principle of exclusion applies
in full measure. Only those who can get these goods are both willing and able
to pay their market prices. A private good is supposed not to have any
externalities, in its case, there is no difference between private and social
marginal costs of supply. And therefore its market price represents its social
supply cost also. In the hands of private sector, its supply would be at the
socially optimum level. Ordinarily, therefore, the provision of private goods
should be entrusted to the private sector. (Benson,
1990)
SIMILARITIES
BETWEEN PRIVATE AND PUBLIC SECTOR
According to Samuelson, 1954 the similarities
between public and private goods include the following:
Serve the Public
Private and public goods ideally serve public interests. The
private sector is beholden to investors and shareholders, which depend on sales
to clients and customers to run profitable businesses. The public sector is
beholden entirely to the public in a more transparent way by providing
essential services and infrastructure.
Competition
The private goods,
companies that provide the same services and goods are naturally in
competition, and the goal of the free market is for various corporations to
gain dominance over one another. In the public sector, certain types of
entities compete in a similar way, such as schools and public health clinics.
Hierarchies
Leaders, administrators, managers and workers exist at every
level of government. In the private sphere, these departmental hierarchies and
specialties exist, except with some slightly different names. These types of
organizational structures are most efficient in delegating work in large
organizations, so it's not surprising they are similar. (Minasian:
1964)
THE DIFFERENCES BETWEEN PUBLIC AND PRIVATE GOODS
The difference between public and private goods is due to differences in inherent properties of the two. (Minasian, 1964) All goods and services have two basic properties rivalry and excludability. Something is rival if one person's consumption will effect another person's consumption. For example if I go to a restaurant, order a hamburger and I am eating it then this good is rival. No one else can be eating the same hamburger I am eating without effecting my consumption of the hamburger. Goods can be non-rival as well, for example lets say we all tuned in to the dame radio station where we are currently at, in this case none of us are effected by everyone else's consumption. The second property is excludability, let's go back to the hamburger the restaurant can exclude me from getting a hamburger, I have to pay for it in order to get one, so it is excludable. Goods that are non-excludable we cannot stop people from consuming, for example I cannot stop people from using the air to breathe. (Samuelson,1954)
So
a private good is one that is both rival in consumption and excludable and a
public good is one that is non-rival and non-excludable. Truly public
goods are very rare, we often use national defence as an example. We are
all getting the same amount of protection so it is non-rival and even those who
don't pay for the good we cannot stop from having it. For example a
person who doesn't pay their taxes still gets to have to good of national
defense. Public goods are truly where we have a market failure problem
because no firm could provide the good because they couldn't stop people
consuming it without paying for it.
On the other hand most of what our government provides is private goods. We call this the public provision of a private good. For example education is a private good, it is rival, i.e. the more students I have in my classroom the harder it is for them to learn and it is also excludable, an entity can keep people from consuming the good Unless there is an externality problem as we discussed before the public provision of a private good will lead to loss of economic efficiency. In terms of "public education", which is really the public provision of a private good the economic argument for the government paying for it is based on the assumption that there is a positive externality associated with it. However as discussed last time the amount that should be paid needs to be equal to the size of the externality, if the provision is too much or too little then the efficiency loss still exists. (Cowen 2003)
Another common private good is healthcare, again it is rival (if I am seeing the doctor then he can't be seeing you at the same time) and it is excludable (again a doctor can exclude people). Again this is not a "rights" issue; it is the properties of the type of good issue. Again maybe there is a positive externality, but it would be very difficult to determine its size.
So this leads to the following economic problem if a good is truly a private good and not a public one, we cannot simply ignore that fact and wish it to be a public good. When we socially try to provide private goods we run into a host of problems. For example we cannot have healthcare for everyone because of scarcity. There are simply not enough doctors to do so. That is the importance of markets; they allocate private goods through prices. While some may not like this, it does not change the fact that scarcity and this problem exists. For example, I can write on a piece of paper that I will grow bananas in Antartica, but it doesn't change the fact that I cannot. Markets are what allocate private goods efficiently and due to scarcity it always means that not everyone is going to get a particular good or service, but is also means that the most people possible will. My values and your values will not change the characteristics of a particular good.
So when we try to solve societal private goods problems (which we have created in large part due to our values) we only cause other externalities (rationing, black markets, ...) and make an impossible outcome seem possible because we wrote it down on a piece of paper. So next time you hear a debate on these types of goods or are thinking about it yourself, remember the physical limitations of the metaphysical world in which we live. Everyone wants Utopia, but Utopia is unattainable, so we need to efficiently use the resources we have to the mutual benefit of all, and that happens through markets when the good in question is a private good. And a private/public good is a private/public good due to its qualities and not due to our values.
Public
goods are ones whose benefits are indivisibly spread among the entire
community, whether or not individuals desire to purchase the public goods.
Private goods by contrast are ones that can be divided up and provided
separately to different individuals, with no external benefits or costs to
others. Efficient provision of public goods often requires government action,
while markets can efficiently allocate private goods.
CONCLUSION
In conclusion we can say that public and private goods are
very similar to each other and they have differences but despite all these
public and private goods are still very significant in the study of public
finance. Private goods are basically in favour of large-scale production for
which either the society should agree to monopolistic type of private
enterprise or should go in for public sector. Private
goods are almost exclusively made for profit, and there is rivalry involved in
obtaining the product or service. Private goods can include clothing and food.
REFERENCE
Benson, Bruce. The Enterprise of Law. San
Francisco: Pacific Research Institute for Public Policy, 1990.
Buchanan, James M. “Public Goods in Theory and
Practice: A Note on the Minasian-Samuelson Discussion.” Journal of Law and
Economics 10 (October 1967): 193–197.
Cowen, Tyler, ed. Public Goods and Market
Failures. New Brunswick, N.J.: Transaction Publishers, 1992.
Cowen, Tyler, and Eric Crampton, eds. Market
Failure or Success: The New Debate. Cheltenham, U.K.: Edward Elgar, 2003.
Klein, Daniel. “Tie-ins and the Market Provision of
Public Goods.” Harvard Journal of Law and Public Policy 10 (Spring
1987): 451–474.
McCallum, Spencer Heath. The Art of Community.
Menlo Park, Calif.: Institute for Humane Studies, 1970.
Minasian, Jora R. “Television Pricing and the
Theory of Public Goods.” Journal of Law and Economics 7 (October 1964):
71–80.
Minasian, Jora R. “Public Goods in Theory and
Practice Revisited.” Journal of Law and Economics 10 (October 1967):
205–207.
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