7-a - Report on the Orange County Tax Equity Study

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CCM Economics, LLC Orange County Tax Equity Page 45 Appendix C One of the interesting things about publicly vs. privately provided good is the nature of the goods. To determine if a good is a public good or a private good, economists use two criteria: excludability and rivalry. If a good in non-excludable, it is impossible, or at least very expensive, to exclude non-payers from consuming the good. If a good in non-rival, then one person’s consumption doesn’t diminish the amount available to others to consume. Public goods are both non-excludable and non-rival. National defense is a great example of a pure public good. It is impossible to exclude people who reside within the borders of the United States and don’t pay their taxes from receiving the benefits of national defense. At the same time, if another person is born in the US, there is still the same amount of national defense available to everyone as there was before the person was born. On the other hand, a candy bar is both excludable and rival. Stores can relatively easily keep people who don’t pay for candy bars from consuming a candy bar and if someone eats a candy bar, that particular candy bar isn’t available to others to consume. Because of these properties, public goods will not be provided in the correct quantities if they are provided by the private sector—hence they are often provided by the public sector.25 25 Interestingly, to determine the value of public goods to society, one adds ‘vertically’ a s opposed to adding value ‘horizontally’ for private goods. To illustrate, assume that pizza is a private good and that there are 3 people in a society. At a price of $10, Abe buys 2 pizzas, Barb buys 3 pizzas, and Charles buys 4 pizzas so that at a pric e of $10, the market demand for pizzas is 7 meaning that the 7 th pizza is worth $10. Now assume that a park is a public good and that the government provides one park at a cost of $10. Abe values the park at $5, Barb values the park at $12, and Charles values the park at $20. The value of the park is $37 and the government has created $27 of ‘consumer surplus’ by providing the park. 82