Private Provision of Public Goods

Abstract

This note argues that it is hard for private institutions to provide the public goods that the government provides. In other words, there will tend to be an under provision of public goods if private institutions provided them. The explanation this note provides hinges on the very nature of what public, as opposed to private, goods are. Excerpt UVA-GEM-0144 Aug. 17, 2016 Private Provision of Public Goods Many public goods are provided by the government. This note argues that one of the reasons why the government takes on this role is that it is very hard for private institutions to provide public goods in sufficient quantity without the government's help. In other words, there would tend to be an underprovision of public goods. The explanation this note provides hinges on the very nature of what public, as opposed to private, goods are. There are different types of goods. A soft drink that you buy in a supermarket is an example of a purely private good. Because you buy the good and consume it yourself, you will benefit from the soft drink, not someone else. Therefore, consumption of the soft drink is said to be rival. Moreover, with private goods, it is relatively easy to exclude people from consuming the good, which is why the price system works well as a means of distributing private goods. By buying something, you get exclusive access to it. National defense, safe cities, clean air, and clean water are very different types of goods, however: they are public. Once the country is protected, once the streets are safe, or once the air or the water in an area is clean, everyone benefits from the security, the air, or the water, and one person's benefit does not diminish somebody else's. In other words, the consumption of a public good is nonrival. In addition, it is not trivial to exclude other people from access to security (once the country is defended), from the benefit of safe cities, or from clean water or air, which is why it is difficult to use the price mechanism to distribute public goods. Because of those two special characteristics of public goods (nonrivalness, nonexclusivity), it is not so easy to find out how much of these goods should be provided, and also at what price. It is often argued that the government should guarantee the provision of purely public goods because of those characteristics. If private institutions were to provide public goods (without government support), there would be a tendency to undersupply. . . .