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Unit 1 Micro: Public Goods
11th February 2012
Public goods provide an example of market failure resulting from missing markets.
The characteristics of pure public goods are the opposite of private goods:
Non-excludability: The benefits derived from pure public goods cannot be confined solely to those who have paid for it. Indeed non-payers can enjoy the benefits of consumption at no financial cost – economists call this the ‘free-rider’ problem. With private goods, consumption ultimately depends on the ability to pay
Non-rival consumption: Consumption by one consumer does not restrict consumption by other consumers – in other words the marginal cost of supplying a public good to an extra person is zero. If it is supplied to one person, it is available to all.
Non-rejectable: The collective supply of a public good for all means that it cannot be rejected by people, a good example is a nuclear defence system or flood defence projects.
There are relatively few examples of pure public goods. Examples include flood control systems, some of the broadcasting services provided by the BBC, public water supplies, street lighting for roads and motorways, lighthouse protection for ships and also national defence services.
Public goods and market failure
• Pure public goods are not normally provided by the private sector because they would be unable to supply them for a profit.
• It is up to the government to decide what output of public goods is appropriate for society.
• To do this, it must estimate the social benefits from making public goods available.
The Free Rider Problem
• Because public goods are non-excludable it is difficult to charge people for benefitting form a good or service once it is provided
• The free rider problem leads to under-provision of a good and thus causes market failure
Quasi-Public Goods
A quasi-public good is a near-public good i.e. it has many but not all the characteristics of a public good. Quasi public goods are:
1. Semi-non-rival: up to a point, extra consumers using a park, beach or road do not reduce the space available for others. Eventually beaches become crowded as do parks and other leisure facilities.
2. Semi-non-excludable: it is possible but often difficult or expensive to exclude non-paying consumers. E.g. fencing a park or beach and charging an entrance fee; building toll booths to charge for road usage on congested routes
The case for government intervention in the case of public goods
* The non-rival nature of consumption provides a strong case for the government rather than the market to provide and pay for public goods.
* Many public goods are provided more or less free at the point of use and then paid for out of general taxation or another general form of charge such as a licence fee.
* State provision may help to prevent the under-provision and under-consumption of public goods so that social welfare is improved.
* If the government provides public goods they may be able to do so more efficiently because of economies of scale.
* Direct provision of a public good by the government can help to overcome the free-rider problem which leads to market failure
A selection of recent news clips linked to the concept of public goods
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.