Question

Why is it difficult for the market to deliver socially efficient quantities of of some goods like clean air, street lighting, or police services? Explain your answer.

Answer 1

In economics there are two kinds of goods. One category of goods are normal private goods. These goods are also called excludable goods. These goods can be excluded from being consumed by others.

For example, purchasing car for oneself, buying any item for personal consumption for a certain price are private goods.

However, the other category of goods are public goods. These goods are meant to be used by the general public. For such goods, pricing is very different from the private goods.

Pricing may take place in the form of a certain fee to be paid in order to use or in some of the public goods pricing may be in the form of income taxes.

Most importantly, many of the public goods are inexcludable which means it is very difficult to exclude people from consuming these goods. For example, clean air, national security, or even police services are inexcludable goods, i.e., it is almost impossible to exclude those who have not paid for these goods for consuming them.

A poor American who barely has money to take care of himself is equally protected from enemies as is a rich American who has paid for national security in the form of income tax.

Similarly, if a green tax is levied upon general population of a state or a city, proceeds from which is used to reduce pollution in the geographic region, it is very difficult to exclude those who have not paid the green tax because of non-excludability of nature of public goods such as clean air or environment.

Thus, in order for the market to deliver socially efficient quantities of of some goods like clean air, street lighting, or police services, the goods must be excludable so that their consumption can be excluded from those not paying for it.

However, most of public goods are non-excludable which leads to rent-seeking by some consumers.