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Public goods and privatisation
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Some goods would not be provided at all by the free market. And sometimes the government sells businesses it owns to the private sector.
Public goods
A public good has two features:
Non-excludable: people cannot be stopped from using it, even if they do not pay.
Non-rival: one person's use does not reduce what is available for others.
Examples: street lighting, national defence, lighthouses.
Non-excludable: people cannot be stopped from using it, even if they do not pay.
Non-rival: one person's use does not reduce what is available for others.
Examples: street lighting, national defence, lighthouses.
The free-rider problem
Because people cannot be excluded, they can use the good without paying: they are free riders.
So private firms cannot make a profit and will not provide it. The government provides public goods, paid for by taxation.
Both sectors have roles: the public sector provides public goods; the private sector provides most other goods.
So private firms cannot make a profit and will not provide it. The government provides public goods, paid for by taxation.
Both sectors have roles: the public sector provides public goods; the private sector provides most other goods.
Privatisation
Privatisation is the transfer of a business or industry from the public sector to the private sector.
Consumers: may get lower prices and better quality through competition, or higher prices if a private monopoly forms.
Workers: may lose jobs as firms cut costs, but may gain from efficiency.
Businesses: gain a profit motive and new investment.
Government: raises money from the sale and no longer funds losses, but loses control.
Consumers: may get lower prices and better quality through competition, or higher prices if a private monopoly forms.
Workers: may lose jobs as firms cut costs, but may gain from efficiency.
Businesses: gain a profit motive and new investment.
Government: raises money from the sale and no longer funds losses, but loses control.
Why will a private firm not provide street lighting?
- People cannot be excluded from using it.
- They would use it without paying.
Answer: Because of the free-rider problem, it cannot make a profit.
Public goods are non-excludable and non-rival, so free riders mean the market will not provide them; the government does. Privatisation moves firms from the public to the private sector, with effects on consumers, workers, businesses and government.
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