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Public and
Private Goods

Understand how goods are classified by excludability and rivalry, and why markets sometimes fail to provide them efficiently.

AP Microeconomics

What Makes a Good a Good?

In economics, every good or service can be classified along two critical dimensions. These dimensions determine how markets allocate them and whether government intervention may be needed.

Excludability
Can people be prevented from using the good? If the owner can block non-payers, the good is excludable.
Rivalry
Does one person's use reduce the amount available to others? If so, the good is rivalrous in consumption.

The Four Types of Goods

EXCLUDABLE Yes No RIVAL Yes No Private Goods Food, clothing, cars Common Resources Fish in the ocean, clean air Club Goods Cable TV, private parks Public Goods National defense, streetlights

Private Goods in Detail

Private goods are the most common type in a market economy. They are both excludable and rivalrous: the owner can prevent others from using them, and one person's consumption directly reduces availability for others.

1
Excludable: A store can refuse to sell you a sandwich unless you pay. Property rights are enforceable.
2
Rivalrous: If you eat that sandwich, nobody else can eat it. The good is "used up" in consumption.
3
Market efficiency: Because of these properties, private goods are efficiently allocated through supply and demand in competitive markets.

Public Goods in Detail

Public goods are the opposite of private goods. They are non-excludable and non-rivalrous: you cannot prevent anyone from benefiting, and one person's use does not diminish another's.

1
Non-excludable: Once national defense exists, every citizen is protected whether they paid taxes or not.
2
Non-rivalrous: Your enjoyment of a streetlight does not reduce the light available to your neighbor.
3
Market failure: Private markets underproduce public goods because firms cannot charge non-payers. Government typically provides them.

The Free-Rider Problem

Public Good Taxpayer A Pays taxes ✓ Taxpayer B Pays taxes ✓ Free Rider Doesn't pay ✕ All three receive equal benefit Non-excludability means the free rider cannot be blocked

Club Goods and Common Resources

Club Goods
Excludable but non-rivalrous. You can block non-payers, but one person's use doesn't reduce availability. Examples: streaming services, toll roads, private golf courses.
Common Resources
Non-excludable but rivalrous. Anyone can use them, but one person's use diminishes what's left. Examples: ocean fish stocks, clean air, public grazing land.

The Core Classification Rule

Identify the Good Is it excludable? Yes No Is it rival? Is it rival? Yes No Yes No Private Club Common Public

Public vs. Private: Key Distinction

Private Goods Public Goods
Excludable? Yes No
Rivalrous? Yes No
Provider Private markets Government (usually)
Price mechanism Works efficiently Fails (free riders)
Demand curve Horizontal summation Vertical summation
Risk Overproduction possible Underproduction likely

Demand for Public Goods

Price (P) Quantity (Q)
\(D_A\)
\(D_B\)
\(D_{MKT}\)
 At any Q, sum the willingness to pay (P) of each consumer.

Optimal Provision of Public Goods

The socially optimal quantity of a public good is where the marginal social benefit (MSB) equals the marginal cost (MC) of production. Since MSB is the vertical sum of individual demands:

Underproduction
If left to private markets, \( Q_{\text{market}} < Q_{\text{optimal}} \) because free riders reduce revealed demand.
Government Role
Governments use cost-benefit analysis to estimate true MSB, then provide the good funded by taxes.

How to Classify Any Good

1
Ask: "Can someone be prevented from using it?" If yes, it is excludable. If no, it is non-excludable.
2
Ask: "Does one person's use reduce what's left?" If yes, it is rival. If no, it is non-rival.
3
Place on the matrix: Excludable + Rival = Private. Non-excludable + Non-rival = Public. The other two are Club or Common.
4
Identify the market failure: Public goods → free-rider problem. Common resources → tragedy of the commons. Club/private → typically no market failure.

Example: National Defense

Classify national defense using the two-question test.

1
Excludable? No. The military protects all citizens regardless of whether they pay taxes. You cannot "opt out" of being defended.
2
Rival? No. Protecting one more citizen does not reduce the defense available to others. The marginal cost of adding a person is essentially zero.
3
Classification: Non-excludable + Non-rival = Public Good. Government provides via taxation.

Example: Ocean Fish Stocks

Classify fish in the open ocean using the two-question test.

1
Excludable? No. International waters are open to all. No single entity can prevent others from fishing in the ocean.
2
Rival? Yes. Each fish caught by one boat is a fish unavailable to all other boats. The resource is depleted by use.
3
Classification: Non-excludable + Rival = Common Resource. Subject to the Tragedy of the Commons.

Example: Netflix Subscription

Classify a Netflix subscription. This one is trickier because it doesn't fit neatly into "private" or "public."

1
Excludable? Yes. Netflix requires a paid account to stream. Non-subscribers are blocked from the content.
2
Rival? No. Your watching a show doesn't prevent someone else from watching the same show at the same time (ignoring bandwidth limits).
3
Classification: Excludable + Non-rival = Club Good (also called a natural monopoly or artificially scarce good).

Common Mistakes

✕ "Public" Means Government
"Public good" is an economic term about excludability and rivalry, not about who provides it. A good provided by the government is not automatically a public good in the economic sense.
✕ Confusing Rival and Excludable
Students often conflate the two. A toll road is excludable (you need to pay) but may be non-rival (no congestion). Think of each property independently.
✕ Horizontal Sum for Public Goods
For public goods, you sum demand curves vertically (add prices at each quantity), not horizontally. Horizontal summation is for private goods only.

Complete Summary Table

Type Excludable? Rival? Example Market Issue
Private Yes Yes Food, clothing None (efficient)
Club Yes No Cable TV, gyms Artificial scarcity
Common No Yes Fish, clean air Tragedy of Commons
Public No No Defense, streetlights Free-rider problem

Question 1 of 5

A lighthouse provides light that guides all ships at sea. One ship's use of the light does not reduce the light available to other ships. A lighthouse is best classified as a:

Question 2 of 5

The free-rider problem is most likely to occur with which type of good?

Question 3 of 5

For a public good, the market demand curve is found by:

Question 4 of 5

A crowded public highway (no toll) where traffic congestion slows everyone down is best classified as a:

Question 5 of 5

Which of the following is the best example of a club good?