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:

·        Excludability: 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 restaurant)

·        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

·        Rejectability: 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

Public goods are services which are clearly in demand, but which must be provided collectively by the Government for two main reasons;

·        Non excludability - the goods cannot be confined to those who have paid for it.

·        Non rivalry in consumption - the consumption of one individual does not reduce the availability of goods to others.

Examples 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 principle.

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.