Public Expenditure VS Private Expenditure

Where the pros come to learn

Public Expenditure are carried out by national and local government and public sector enterprises.
Private Expenditure is carried out by individuals and businesses that are not government owned.

In Favor of Private Spending

  • Individuals are best placed to choose how to spend their money
  • The government can only guess
  • When the government spends money, it may be wasteful, delayed or inefficient
  • Government spending on one item always involves a significant opportunity cost

In Favor of Public Spending

  • The government can provide public goods and merit goods that the market would not produce in sufficient quantities for everyone
  • There will be no discrimination and it will be fair for all

Characteristics of Private Goods

  • A product that may be purchased in order to be consumed and whose consumption by one individual prevents another individual from consuming it is called a private good. They are almost always exclusively made for profit e.g. a loaf of bread
  • Excludability: Consumers can be excluded from consuming the product if they are not able to demand (unable or unwilling to pay)
  • Rivalry: One person using the good will decrease its use for other people, therefore preventing simultaneous consumption. This is called paretto efficiency.
  • Rejectable: If consumers don’t like the good/service, they may stop using it.

Characteristics of Public Goods

  • A good which is not made for profit and aims for common welfare e.g. defense systems
  • Non-Rivalry: The consumption of the good by one individual does not reduce availability or amount of the good for consumption by others
  • Non-Excludability: No one can be effectively excluded from using the good. It is not possible to provide a good/service to one person without it being available for others to enjoy.
  • Types of Public Goods:
    Common Good/ Pool/ Resources: These goods are rivalrous but not excludable e.g fishing in the ocean
    Club Goods/ Natural Monopoly/Toll Goods: They are excludable but non- rivalrous, until a point where overcrowding occurs. Such goods can easily exclude non-tax payers e.g. cable television
  • Summary:
Rival Non-Rival
Excludable Private Good e.g. food Club Good e.g. private parks
Non-Excludable Common Pool e.g. coal Public Good e.g. air
  • Problems of a Public Good:
    Free Rider Problem: A free rider is a person who receives the benefit of a good but avoids paying for it in the form of taxes or other fees. Firms cannot prevent non-payers from consuming the good.
    Measuring the Social Benefit: Cost benefit analysis is not always reliable

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