Certain social products may be classified as public or collective goods. Examples are national defense, law and order, the administration of justice, air traffic control, and public safety. These products have three common characteristics. These are:
1. Inclusiveness — The benefits of a social good are indivisible: they cannot, be denied any one, regardless of whether he pays for them or not. This is not the case with non-public goods — that is, a private good like food or clothing or certain social goods such as toll highways or National
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parks — since someone who does not pay can conceivably be excluded from their use. Hence, a non- social good is subject to, what is technically known as the exclusion principle whereas a social good is not.
2. Zero Increment or Marginal Costs — There is no increase in the cost of a social good if it is provided to one more consumer. Hence we say that the additional or incremental cost — commonly called ―marginal cost‖ — of the commodity is zero. Thus the, cost of National Defense, Law and Order, or any other commodity mentioned above does not increase with unitary increases in the population. However, this characteristic is also true of many private as well as other social goods. For example, there are no significant incremental or marginal costs to a movie theatre or to a public library resulting from the admittance of one more patron.
3. Spill-over Effects — A social good creates spillover — external benefits or costs resulting from activities for which no compensation is made. For example, air traffic control at busy airport reduces noise for some nearby resident while increasing it for others. This is an unpaid — for benefit to the former group and, an uncompensated ―cost‖ to the latter. Similarly, in the private sector of the economy a factory may provoke income and employment benefits to the community while at the same time polluting its environment. Thus spillover effects, like zero incremental costs, are not a unique property of social goods.
In summary, social goods are non-rival in the nature of access; consumption does not diminish its benefit from another use. They are not traded in a marketplace, and one can‘t sell social goods in units. For instance, fire services are consumed but are still available for others in the public, while if someone consumes a gallon of milk, no one else can directly benefit from the milk. With private goods, there is the precondition of ownership that doesn‘t really exist for social goods.
You can‘t internalize the costs of privately produced goods.
150 3.2 Social Goods and Market Failure
Social goods are those goods and services provided by the government because a market failure has occurred and the market has not provided them. Sometimes it is in our benefit not to allow for a market provision. In the case of police, national defense and public education it can be argued that private provision of these services would be less desirable for a variety of reasons.
Proponents of government intervention in production argue that there is market inadequacy and sums their argument in the following illustration. Imagine that there is some good X that is valuable to say about 1,000 people. And if this good X is produced, each of these 1000 will be able to benefit from it, whether or not they contributed to its production. The question here then is what will be your reaction if you were among these 1,000 persons and asked to contribute?
According to the Samuelsonian theory of public goods, you are likely to reason as follows:
―Either the other 999 are going to raise a sufficient amount of money to fund the good X, or they aren‘t suppose they do raise enough, then good X will be funded whether you pay or not, so you might as well not pay, so you can take advantage of the benefits without paying the costs. This is what is referred to as the Free Rider problem. If too many consumers decide to ‗free-ride‘, private costs exceed private benefits and the incentive to provide the good or service through the market disappears. The market thus falls to provide a good or service for which there is a need.
On the other hand, if they fail to raise enough money to fund the production of the good X, then the good won‘t be funded even if you do contribute, so there‘s no point in throwing your money away. This is what is known as the Assurance problem. The chance that your contribution or not will make the decisive difference to the funding of good X or not is so completely insignificant as to be quite properly ignored. So either way, regardless of what others do, it is in your interest not to contribute. So you will not and you completely refuse to do so.
The problem is that the other 999 people in the group are reasoning the same way, and so good X never gets funded - despite the fact that everyone would be better off - by their own standards - if good X were funded. It is in everybody‘s collective interest to cooperate, but in everyone‘s individual interest to defect; and since it is individuals, not collectives, who make decisions, the result is that no one cooperates and the public good is never produced. The market system of voluntary cooperation appears to have failed. This is where we say the market system has failed.
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Here the scenario is that the individuals‘ pursuit of pure self-interest leads to results that are not efficient or that can be improved upon from the societal point-of-view. In other words, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. The outcome is not Pareto optimal or Pareto efficient.
This phenomenon, market failure, exists when the system fails to function properly and the following conditions exist:
1. Non-Competitive Markets — This is when adequate competition does not exist. In an age where mergers are all too common, the result has been an increase in larger and fewer firms in many industries. In extreme cases, this results in a monopoly. The greatest threat that a monopoly poses is that it denies consumers the benefit of choice and competition. Because a monopoly occupies the top spot in its market, it can use its position to impede competition and restrict production. Thus in the end there are artificial shortages and higher prices.
2. Information Asymmetries - Buyers and sellers are not well informed. In order to efficiently allocate resources, consumers, business people, and government officials must have adequate information about market conditions. Without information uneducated decisions are made. This leads to mistakes and thus, market failure.
3. Resource Immobility — When resources are not free to move from one industry to