Just as private-sector economics deals with the wants and their satisfaction of household and firms, public sector economics, more commonly called public finance, deals With the question of collective wants and their satisfaction. The objective of both private sector economics and public sector economics is similar. Private sector economics aims at maximizing satisfaction through efficient use of the available resources: likewise, public Sector economics of public finance aims at maximizing social welfare or social benefit by efficient use Of social goods. The distinction between private and social goods are important in the study of public finance, for the latter is intimately connected with the theory of social goods and the study Of collective wants.
Private goods refer to all those goods and services which are consumed by people to satisfy their personal and private wants or needs. They relate to articles of food, clothing, shelter, recreation, transportation, communication etc. These goods are priced in the market on the basis of their cost of production on the one side and the nature of demand on the other. All those who want them and are willing to pay the market price will buy them. “Those who do not want these goods or who are not in a position to pay for them will be excluded from the consumption of these goods. In other words, there is no compulsion that everyone will have to buy them. Thus the distribution of these goods is based on effective demand and market price. As a result, only those who do demand the. private goods will pay for their cost of production on a voluntary basis. Private goods have the following characteristics :
(i) Divisibility: Private goods are divisible in the sense that price mechanism divides people into two groups, vi:., those who want to consume them and those who do not. Also, private goods may be divided into small units. so these are divisible in nature.
(ii) Rival in Consumption: According to this principle, private goods yield satisfaction only to the person who consumes the goods. It is denied to others, only the person who drinks a cup of.tea, for example, benefits from the consumption of that cup of tea and tea consumed by one person can not be consumed by anyone else. Thus private goods are said to be rival in consumption.
(iii) Exclusion Principle: According to the exclusion principle, those who do not pay the market price for goods are excluded from their consumption, Thus A consumes a good because he pays the price for it and B is excluded from its consumption since he does not pay the price.
(iv) Revealed Preference: Under the existence of exclusion, the functions as an auction system. Consumers bid for the product and in the, process they reveal their preference. Producers take the signal thus given and produce those goods Which consumers want. In this way, the market operates an information given by consumers. Those who will fail to provide such information, that is, are unable to reveal their preference will be excluded from consumption.
Therefore, the ability to pay the price of goods, the divisibility of the goods, rivalry in the consumption and the exclusion principle, all go together in determining the nature Of private goods.
private economics is concerned with the activities of the individual that are directed towards the satisfaction of individual wants. Public finance studies the production activities of the state as directed towards the satisfaction of public wants. Issues involved in this study are the choice of the public services which are to be produced and the determination-of their respective shares and the distribution of the cost among the consumers, etc. ‘Illerefore, the core of fiscal theory addresses the question Of what public services should be provided by the public sector and how much.
Defence, education, public health, infrastructural facilities like power, transportation and communication, etc., are examples of collective wants. Goods and services produced to satisfy collective wants are known as social goods; These goods are produced and supplied by the society to meet its collective wants for increasing social welfare. These goods are supplied by the country to all its citizens but the degree of benefit a person derives will depend upon the use he can put it to. For example, the Indian Government spends 25,000 crores a year to provide protection to the country against foreign aggression and the benefits of defence arrangements are available to every citizen of the country. Likewise, educational and medicål facilities are made available for all the people of the country.
Public goods have just the opposite qualities. Public goods are goods that would not be provided in a free market system, because firms would not be able to adequately charge for them. This situation arises because public goods have the following particular characteristics :
(1) Non-divisibility: public goods cannot be divided and their benefits cannot be shared between people on the basis of each man’s requirements. In Other words, unlike private goods, social goods are not divisible but have to be collectively consumed. If social goods are made available to meet collective wants, the question is; who will pay for them or in what proportion will they bear the cost of production of these goods and services?
(2) Non-Excludable: Once the goods are provided, it is not possible to exclude people from using them even if they have not paid. This allows the ‘Free riders’ to consume the goods without paying.
(3) Non-Rival: This means that the consumption of the goods by one person does not distribute the amount available for the next person.
(4) Marginal Cost may be zero or close to zero: An important characteristic of social goods is that their marginal cost may be zero or close to zero. The total cost of production of a bridge or of a radio broadcasting station is given and the use of the services of the bridge by an additional vehicle or by an additional listener of radio broadcast will not add to the total cost. In other words, an additional member of the community can benefit from the existing stock of capital goods without adding to its total cost. This is the meaning of zero marginal cost in the case of social goods. But the concept of zero marginal cost should not be extended too far. When the population expands the defence budget would also expand, likewise, the production of other social goods would also increase.
(5) No role of Price Mechanism: Price mechanism fails in these goods as it cannot establish the link between production and consumption. Since social goods are supplied to all people irrespective of their ability and willingness to pay tor them, the pricing system is useless and, therefore, a method of compulsory payment will have to be designed to finance their cost of production.