Question

Compare and contrast private goods and public goods? Briefly explain why public goods can cause market failure

Answer 1

Private goods are the goods that are excludable and rival in nature. A good is excludable if one can prevent others from using it like we cannot consume food and clothes free of cost without paying for it and can prevent its consumption if someone has not paid for it. A rival good means that the consumption of that good reduces the amount consumed by others of that good. For example, train tickets can be considered as a rival good, because there are limited tickets and if it is consumed by one person then the other one cannot get it.

Public goods are non-excludable and non-rivalry in nature. This means that the consumption of these goods cannot prevent others from consulting it and it is available for all to consume. Example of public goods is public parks, national defence, fresh air etc.

Public goods are provided by the government and because of its non-excludability nature, no one can be prevented from using it. Some times this creates free riders problem (it is a problem created when the allocated public good is overconsumed by some which leave others to either under consume or not consume it at all. Thus when this problem arises, this creates a situation of market failure (which is an inefficient allocation of goods and services in the market).