Explain why the provision of bus and local rail (mass transit) services in cities is classified as a private good and not a public good and consider why such services might only be provided by the private sector. [8]
ESSAY OUTLINE
Introduction
Explanation of public and private sector
Explanation of what is meant by excludability/non excludability
Explanation of what is meant by rivalry/non rivalry
Analysis 1
Application of excludable / non excludable - mass transit services
Analysis 2
Application of rivalry / non rivalry - mass transit services
Evaluation and Conclusion
Reasons for private sector to be operating the mass transit services
Profit maximisation - efficient
Competition - improved allocation of resources
Private sectors are businesses that are owned and run by private individuals. These entities are driven by profit motive and maximising shareholders value. Examples of private sector organisations are sole traders, partnerships , private limited and public limited companies.
Public sector is controlled and owned by the government. Their main aim is to maximise welfare to its people. In a mixed economy, the public sector strives to provide goods and services that are underprovided or not provided by the private sectors. Examples of public sector organisations are schools and hospitals.
Important differences between a private goods and public goods is the nature of the goods. Some goods are non-excludable and non-rivalrous therefore it creates a free rider problem, hence discouraging the private sector from producing these goods. Non-excludable refers to the provider's inability to prevent those who have not paid for the good from consuming / benefiting from it. Non-rivalry is when a person consumes a good, its availability diminishes for others.
In the case of mass transit services in the city, it is rival and excludable in nature, therefore it is a private good. This is because the operators of the system can exclude people from using it via ticketing. Only those with tickets are allowed to use the service therefore successfully creating a barrier to exclude non-payers (non ticket holders). In certain circumstances, the passengers may be able to use the services without paying. The fare evasion is illegal and can be punished by law, therefore it is not a public good because the regulation discourages people from gaining a free ride.
The services can be non-rivalrous since the service does not diminish as others uses it, providing a hint of the service being a public good. However, this is not entirely true, since the availability of seats may reduce usage for others especially during peak hours, where supply of the services may not be adequately available to all ticket users at the same time. This further proves that mass transit is a private good.
Private goods would be best provided by the private sectors. Since the private good market such as rail and bus services can be clearly defined through exclusion and rivalry, it successfully eliminates free-rider problem. Hence, there is an opportunity for private sectors to make profit. Therefore, it is best left to private sectors to provide. Additionally, public sector could concentrate their effort and funding towards provision of goods that are not produced in the market due to the free rider problem such as bus stops and streetlights. Besides that, private sectors being profit maximisers, efficiency will be prioritised. Thus, they are effective in saving costs and ensuring services are provided by allocating resources most efficiently. Furthermore, as private firms compete for passengers, they also ensure the best services are provided in the market thus improving quality.
