Study notes

Public Goods and Market Failure

Public goods provide an example of market failure resulting from missing markets. Which goods and services are best left to the market? And which are more efficiently and fairly provided as collective consumption goods by the state? This is at the heart of your revision of public goods.

Check out our short revision video on public goods

Revision video on public and private goods
Revision video on public and private goods

Central to your revision will be to understand why public goods may not be provided by the market. You can work this out by distinguishing between public and private goods and focusing on the ideas of rivalry and excludability in consumption.

Students should understand the free rider and valuation problems – there are big debates in economics about the optimum size of the state. Rapid changes in technology are also changing the nature of what is and what is not a public good.

What are the main characteristics of pure public goods?

The characteristics of pure public goods are the opposite of private goods:

  1. 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
  2. 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.
  3. 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.

Pure public goods are non-excludable and non-rival in consumption
Revision presentation on public goods

Policing – is policing a public good?

The general protection that the police services provide in deterring crime and investigating criminal acts serves as a public good. But resources used up in providing policing means that fewer resources are available elsewhere. Private protection services such as private security guards, privately bought security systems and detectives are private goods because the service is excludable and rival in consumption and people and businesses are often prepared to pay a high price.

Why are public goods an example of 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.

What is meant by 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

What are 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. Open access Wi-Fi networks become crowded
  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 air waves – a public good or quasi public good?

  • The airwaves used by mobile phone companies, radio stations and television companies are owned by the government.
  • Do they count as a pure public good? One person's use of the airwaves rarely limits how other people can benefit from utilising them.
  • At peak times, the airwaves become crowded
  • The government also controls the issue of licences needed to operate mobile phone services using the airwaves in the UK. In 2000, they auctioned off five licences for 3rd generation mobile phone services and raised £22 billion in doing so. In 2013, the government auctioned off super-fast 4G mobile phone spectrums
Advances in technology are causing a blurring of the distinction between public and private goods

The case for government intervention with public goods

Overcoming the Free-Rider

Direct provision of a public good by the government can help to overcome the free-rider problem which leads to market failure

  • 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.

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