Public Goods
Definition
Public good: a good that is both non-rival and non-excludable in consumption, giving rise to the free-rider problem and non-provision by the market, for example national defence or street lighting.
- Non-rivalry means one person's consumption does not reduce the amount left for others.
- Non-excludability means people cannot be prevented from consuming it, even if they do not pay.
Key Idea
- Because non-payers cannot be excluded, they can free-ride by consuming without paying.
- With everyone free-riding, a profit-seeking firm cannot cover its costs.
- The result is non-provision by the market: a missing market.
The Free-Rider Chain
- Because the good is non-excludable, a firm cannot stop non-payers from consuming it.
- Because it is non-rival, an extra user adds nothing to cost, so charging that user is hard to justify.
- Each consumer reasons that others will pay and so waits to consume for free.
- When everyone reasons this way, no revenue is raised.
- With no revenue on offer, no private firm supplies the good, so the market provides none of it, the classic case of market failure that justifies state provision.
Example
- Consider national defence protecting a country from attack.
- Protecting one more resident costs nothing extra, so it is non-rival.
- No resident can be left unprotected, so defence is non-excludable.
- A firm selling defence could not charge, because residents would consume it without paying.
- So the market supplies none, and the government funds defence through taxation instead.
Pure and Quasi-Public Goods
- A pure public good is fully non-rival and fully non-excludable, such as national defence.
- A quasi-public good has these features only in part.
- A road is non-rival until it becomes congested, and tolls can make it partly excludable.
- Quasi-public goods therefore sit between pure public goods and private goods, so whether the market can supply them depends on how far they can be metered.
Example
- Street lighting benefits every passer-by and cannot be switched off for non-payers, so it is a pure public good.
- A public beach is a quasi-public good, because it can become crowded and access can sometimes be fenced and charged for.
Technology and Excludability
- Excludability can change as technology changes.
- Metering and digital access can make it possible to charge non-payers who once consumed for free.
- Electronic tolls now let firms charge, say £2 per trip, for roads that were once open to all.
- A good's public-good status is therefore not fixed over time; it depends on the technology available to exclude non-payers.
Can the market ever provide public goods?
- The free-rider argument holds because genuine non-excludability removes any way to charge, so a profit-seeking firm earns no revenue and a pure public good such as national defence is simply not supplied.
- But excludability is a matter of degree, not an absolute, since tolls, encryption and metering can turn quasi-public goods such as toll roads or subscription broadcasts into profitable private provision.
- Even where a firm can charge, it may still under-provide, because pricing a non-rival good above the zero marginal cost of serving one extra user needlessly deters beneficial use.
- On balance, the market cannot supply a genuinely pure public good, but whether it provides a particular good depends on how far technology lets non-payers be excluded and on how rival the good becomes as more people use it.
Exam technique
- Test a good against both non-rivalry and non-excludability before labelling it a public good.
- Link non-excludability directly to the free-rider problem and then to non-provision.
- Naming the missing market secures the analysis marks.
- Support the point with a concrete example such as defence or street lighting.
Common Mistake
- Do not label every government-provided good a public good.
- The label depends on the good's technical features, not on who supplies it.
- Do not confuse a public good with a merit good.
- A merit good is rival and excludable, so the market does provide it, just in too small a quantity.
Self review
- State the two characteristics of a public good.
- Explain the free-rider problem.
- Explain why the market provides none of a pure public good.
- Distinguish a pure public good from a quasi-public good.
- Explain how technology can change a good's classification.
