One key area of government spending is on public goods. These differ from private goods, which are normally
left to be provided through the price mechanism. A private good has three main characteristics:
Consumers can be excluded from consuming the product if they are not willing
to pay for it (for example - a ticket to the theatre or a meal in a
Rivalry: One person's consumption reduces the amount that it available for other
people to consume - because scarce resources are used up in producing and
supplying the good or service
private goods and services are rejectable - if you don't like the look of the
soup on the school menu, you can reject the chance to consume it and use your
money to buy something else.
The Nature Of Public Goods
are services which are clearly in demand, but which must be provided
collectively by the Government for two main reasons;
excludability - the goods
cannot be confined to those who have paid for it.
rivalry in consumption -
the consumption of one individual does not reduce the availability of goods
of public goods include flood control systems, street lighting, the police
and national defence.
Public goods (in fact most of them are services!) are not normally
provided by the private sector in an economy. Partly this is because of the free-ride
The “free rider” principle
says that you cannot charge an individual a price for the provision of a non
excludable good because somebody else would gain the benefit from consumption
without paying anything. Consider the case of the provision of traffic
wardens and safety signs on roads. One person's benefit from these services
is not unique - other motorists benefit from the service as well - but they
cannot be stopped and asked to pay for the benefits they derive. The solution
is collective provision.
Financing Public Goods - Collective Provision
The usual solution is for the government to supply public goods either
directly or indirectly (contracting out services e.g. road-gritting), in both
cases funding the services through subsidy and/or taxation.