TheIBAxolotl
What makes a public good
Goods can be classified using two features:
- Rivalry: one person's use reduces what is available to others.
- Excludability: it is possible to stop people who have not paid from using the good.
A pure public good is non-rivalrous and non-excludable. Examples include street lighting, national defence, flood barriers, lighthouses and public fireworks displays. One more person benefiting from street lighting does not reduce the light for anyone else, and it is impractical to light a street only for those who paid.
| Excludable | Non-excludable | |
|---|---|---|
| Rivalrous | private goods (a sandwich) | common pool resources (fish in open seas) |
| Non-rivalrous | club goods (streaming service, toll road with no congestion) | public goods (street lighting) |
Do not confuse public goods with goods the government happens to provide. Schools and hospitals are often provided publicly, but they are rivalrous and excludable, so they are merit goods rather than public goods.
The free rider problem
Because people cannot be excluded, each person has an incentive to let others pay and still enjoy the benefit. This is free riding. If enough people free ride, a private firm cannot collect revenue to cover its costs, so it will not produce the good.
Why markets under-provide
The demand that firms can observe through willingness to pay is far below the true social benefit, because people hide their preferences. The market therefore produces too little, often nothing at all. This is called missing markets, an extreme form of market failure. Society loses the benefit that would have exceeded the cost of provision.
Diagram in words (optional): a market diagram with MSB well to the right of the private demand that firms can capture; the private market output is zero or near zero, and optimum output lies where MSB = MSC. The whole area between MSB and MSC up to the optimum is lost.
Because public goods are non-rivalrous, the extra cost of allowing one more user is zero. Charging a price would exclude people for no gain, which is another reason a market price is unsuitable.
Government responses
- Direct provision: the government finances public goods through taxation, removing free riding because everyone pays through the tax system. It must judge how much to provide, which is difficult because there is no market price to signal demand. Cost-benefit analysis is often used.
- Contracting out: the government funds the good but hires private firms to build or run it, for example a private company maintaining street lights under a government contract. This can lower costs through competition, but quality may suffer if contracts are poorly written or monitored.
- Public-private partnerships share financing and risk between the state and private firms.
Technology can change classifications. Encrypted broadcasting turned some television from a public good into a club good because viewers can now be excluded.
Evaluation points
- Government provision faces opportunity cost: tax money spent on flood defences cannot be spent on health.
- Government failure is possible: poor information, political pressure or inefficiency may lead to too much or too little provision.
- Some goods are quasi-public: partly rivalrous or partly excludable (a road that becomes congested at rush hour).
Common mistakes
- Defining a public good as "anything provided by the government".
- Mixing up common pool resources (rivalrous) and public goods (non-rivalrous).
- Forgetting to explain why free riding stops private provision: firms cannot earn revenue.
Exam tips
- 10-mark questions: define both characteristics with examples, explain free riding, and show why the market fails to provide the good.
- 15-mark questions: evaluate direct provision versus contracting out, using cost, quality, accountability and the difficulty of measuring demand. Reach a reasoned conclusion for the specific good in the question.
- Two-mark definitions need both "non-rivalrous" and "non-excludable" explained.