Public Goods
Non-rivalry, non-excludability, the free rider problem, and government provision.
- Define public goods using the criteria of non-rivalry and non-excludability
- Explain the free rider problem and why it leads to market failure
- Evaluate government provision of public goods
- Classify goods as private, public, or common pool using the rivalrous/excludable framework
What are Public Goods?
Public goods have two defining characteristics:
- Non-rivalrous: one person's use does not reduce the amount available to others. Consumption by one does not diminish consumption by another.
- Non-excludable: it is impossible (or impractical) to prevent anyone from consuming the good, whether they have paid or not.
Classifying goods
| Type | Rivalrous? | Excludable? | Example |
|---|---|---|---|
| Private good | Yes | Yes | A cup of coffee, a car |
| Public good | No | No | National defence, street lighting, flood warning systems |
| Common pool resource | Yes | No | Fish in the ocean, clean air, shared grazing land |
| Club good (quasi-public) | No | Yes | Netflix, toll highways, private parks |
Note: Many goods are not perfectly one type — they lie on a spectrum, or behave differently depending on congestion.
The Free Rider Problem
Because public goods are non-excludable, individuals can benefit without paying. This is the free rider problem: rational individuals have an incentive not to pay, hoping others will provide the good. If everyone reasons this way, the good will not be provided at all in a free market — this is market failure.
Private producers cannot charge non-payers, so they have no profit motive to provide the good. The market under-provides or does not provide public goods at all.
Government Provision
Because the free market will not provide public goods, governments typically provide them directly (funded by taxation) or contract out provision to the private sector.
| Advantages of government provision | Disadvantages of government provision |
|---|---|
| Improves social welfare — consumption is increased | Must be financed, which generates an opportunity cost |
| Eliminates the free rider problem | Government may be unable to determine the optimal output level |
| Can achieve economies of scale as the sole provider | Some quasi-public goods (e.g. toll highways) could be provided more efficiently by private firms |
Practice questions for this topic will be added here.