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Guidelines for Setting Charges in the Public Sector -April 2017

3.2  What are the economic characteristics of the good or service?

Understanding the economic characteristics of a good or service can help to guide whether cost recovery is appropriate in a particular situation, and whether full or partial cost recovery is most suitable.

Goods[3] can be grouped based on two key economic characteristics:

  • Is it excludable - can people be prevented from using it?
  • Is it rivalrous - if one person uses the good, does it reduce other's enjoyment of it?

Categorising goods under public, private, merit or club goods is often used to characterise the economic characteristics of goods and services provided by government. Here is a summary of the different types of goods and the way in which they can usefully guide decision making for cost recovery. They are not intended to be determinative.

Public goods

A good is considered to be a public good when excluding people from its benefits is either difficult or costly, and its use by one person does not detract from its use by another. Sometimes excluding other users is not only impractical, but undesirable.

There is a good case for recovering the costs of a public good from the community as a whole via general taxation or, if the benefits are localised, from local government revenue.

Example: Public goods

Common examples of public goods are things like fireworks displays, national security and street lighting.

In practice, pure public goods are very rare. However, many Government-provided outputs share the characteristics of public goods to some extent. Although such goods or services might have some elements of a public good, there still might be justifications for recovering costs.

Club goods

A club good is one where people can be excluded from its benefits at a low cost but its use by one person does not detract from its use by another, at least until the point where congestion occurs.

Example: Club goods

Examples of club goods provided by the public sector include toll roads and nature parks.

The ability to exclude means that it is feasible to charge for the use of a club good. Charging club members can be an efficient way of recovering costs. A common way to charge for the use of a club good is a levy applied to a group of users, such as members of an industry group.

Private goods

A private good is one where people can be excluded from its benefits at a low cost, and use by one person conflicts with use by another.

Example: Private goods

Private goods that the government produces are things like passports and birth certificates. These are specific to the person they are generated for, and can only be used for their own personal use. In this way, they are rivalrous. They are also easily excludable in that the owner of the passport or birth certificate cannot let another person use the documents.

There is a strong case for recovering the costs of a private good from those who benefit from it. Recovery of these costs would most likely take the form of a fee.

Purely private goods are not commonly provided by the public sector. In general, when government provides a good or a service, there is likely to be an element of public benefit for having provided the good or service. In the example above about birth certificates and passports, although there are elements to these goods that are akin to private goods, the wider public also benefits from official identification.

Merit goods

A merit good is one that is likely to be produced at a lower level than the community desires in a free market situation. This may be because the public benefit of the good is greater than the private benefit, and consumers only take into account the private benefit when making decisions. It may also be because the benefits are long-term and consumers don't take these benefits into consideration when making decisions.

Example: Merit goods

An example of a merit good is vaccinations - individuals may be willing to risk not being vaccinated but the health of the population requires a large number of people to be vaccinated.

There may be a case for charging at less than full cost or not charging at all for merit goods, but the difference between the actual cost and the charge to the user is likely to need to come from general taxation.

Notes

  • [3] Note that 'good' in this context can refer to goods or services.
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