The characteristic of non-rivalry of public goods does not lead to non-provision in the absence of government intervention.

Public goods will not be produced in the absence of government intervention. Public goods are goods that are non-excludable and non-rivalrous. A good is non-excludable when it is impossible or prohibitively costly to prevent non-payers from consuming the good once it has been produced. A good is non-rivalrous when the consumption of the good by a consumer will not reduce the amount available to other consumers. Examples of public goods include national defence and street lighting. As public goods are non-excludable, consumers can consume them without paying for them. Therefore, consumers will want to consume public goods without contributing to their production which is known as the free-rider problem. As consumers have no incentive to pay for public goods, private firms which are profit-oriented have no incentive to produce them. Therefore, in the absence of government intervention, public goods will not be produced due to the characteristic of non-excludability.

Many students think that the characteristic of non-rivalry of public goods leads to non-provision in the absence of government intervention. Mr. Edmund Quek will discuss this economic misconception in economics tuition with the students.

Although the characteristic of non-excludability of public goods leads to non-provision in the absence of government intervention, the non-rivalry does not. There are some explanations on how the characteristic of non-rivalry of public goods leads to non-provision. However, these explanations are erroneous. The following is a common explanation which is erroneous.

“As public goods are non-rivalrous, the marginal cost of provision is zero. Therefore, assume that firms seek to achieve allocative efficiency, they should charge a price equal to their marginal cost of provision which, in this case, is zero. However, at a zero price, firms have no incentive to produce the goods which results in non-provision.”

The above explanation is erroneous as it is based on the wrong assumption that firms seek to achieve allocative efficiency. When allocative efficiency is achieved, there will be no deadweight loss and hence social welfare will be maximised. However, maximising social welfare is an objective of the government and not an objective of a firm. Generally, firms seek to maximise profit. Therefore, they will maximise the producer surplus and not social welfare. As the above explanation is based on a wrong assumption, it is erroneous. Take cable television for example. Although it is excludable, it is non-rivalrous. Despite being non-rivalrous, it is produced and a positive price is charged. Therefore, instead of saying that the characteristic of non-rivalry of public goods leads to non-provision in the absence of government intervention, one should say that it leads to under-production as per the following.

“As public goods are non-rivalrous, the marginal cost of provision, which is the additional cost resulting from providing a good to one more consumer, is zero. Therefore, for allocative efficiency to be achieved, the price should be zero, assuming no externalities. However, private firms are profit-oriented and hence will only produce a good at a positive price which corresponds to a quantity demanded lower than that at a zero price. Therefore, even if public goods were produced by private firms, assuming away the characteristic of non-excludability, they would be under-consumed in the absence of government intervention due to the characteristic of non-rivalry.”

 

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