public goods and private goods

What is Efficiency?

A market is efficient when resources are used so that no one can be made better off without making someone else worse off. This is called Pareto efficiency.

Analogy: Imagine a pizza 🍕 that is sliced perfectly. Everyone gets an equal slice and no one can take more without taking from someone else.

Key point: Efficiency is about allocation, not about fairness.

Public Goods

Public goods have two special features:

• Non‑excludable – you cannot stop people from using them. Example: national defence 🛡️, street lighting 💡.
• Non‑rivalrous – one person’s use does not reduce availability for others. Example: a fireworks show 🎆.

Because of these features, private markets often under‑provide public goods – a classic market failure.

Private Goods

Private goods are excludable and rivalrous. Think of a slice of pizza: you can stop someone from eating it, and if you eat it, no one else can.

Because they are both excludable and rivalrous, markets usually provide them efficiently, but problems can still arise if there are externalities.

Example: A student buying a textbook 📚. The student can keep it, and if they read it, no one else can.

Exam Tips 📝

1. Define clearly – Public goods: non‑excludable & non‑rivalrous; Private goods: excludable & rivalrous.
2. Use examples to illustrate each type. National defence for public, pizza slice for private.
3. Explain why markets fail for public goods: free‑rider problem → under‑provision.
4. Show graphical representation if asked: draw demand (MB) and supply (MC) curves. For public goods, the MB curve is horizontal at the social benefit level.
5. Remember the formula for marginal benefit: \$MB = \frac{dB}{dQ}\$ and marginal cost: \$MC = \frac{dC}{dQ}\$.
6. When discussing externalities, note that they can affect both public and private goods.

Quick Flashcard

Public Good? No, it is non‑excludable and non‑rivalrous.

Private Good? Yes, it is excludable and rivalrous.