Answer to Question #200401 in Microeconomics for vtg

Question

Differentiate between public good and private good, giving two features of each. With the aid of diagrams illustrate and then discuss why in the derivation of the aggregate demand for private goods, the goods are summed horizontally while the summation is vertical for public goods

Answer 1

Public goods are goods which exist by nature or goods that are provided by the government for use by the public free of charge whereas private goods are goods that are manufactured by private companies and sold to consumers to satisfy their needs.

Whereas the quality of public goods remains constant, the quality of private goods vary with the ability to buy.

public goods are meant for overall growth and development while private goods are sold to earn profit.

features of public goods

1. Non rivalry - when one individual uses a good, this does not prevent others from using it.
2. Non excludability - it is costly or rather impossible for for one person to exempt others from the use of a certain good.

features of private goods

1. Rivalry - when a good is bought or used by a person, this leaves less of the goods available to others.
2. Excludability - failure to pay for the goods offered by the seller results in exclusion of consumers from consumption of the good.

The derivation of the aggregate demand for public good

This means that if each of several individuals have a demand curve for a public good, then the individual demand curves are summed vertically to obtain the aggregate demand curve. This is because of the rivalry nature of the goods. Demand is summed vertically because all individuals enjoy and are satisfied equally.

The derivation of aggregate demand for private good

When deriving the aggregate demand for a private good, individual demand curves are summed horizontally. This is because customers cannot consume the same number of units of a given commodity.