Public Goods and Market Failure
- AQA, Edexcel, OCR, IB
Last updated 14 Mar 2023
This topic video looks at public goods, it discusses their main characteristics and makes the link between public goods, missing markets and market failure.
Pure public goods are goods that are non-rivalrous and non-excludable. Non-rivalrous means that one person's consumption of the good does not reduce the amount available for others, while non-excludable means that it is difficult or impossible to prevent someone from enjoying the benefits of the good, even if they do not contribute to its production.
The existence of pure public goods can cause market failure because they are not efficiently allocated through the market mechanism of supply and demand. Because public goods are non-excludable, there is no way for private firms to charge consumers for their use. As a result, private firms may be unwilling to invest in the production of public goods because they cannot capture the full value of their investment.
Furthermore, because public goods are non-rivalrous, consumers may be unwilling to pay the full cost of their production, as they can free-ride on the consumption of others. This can result in under-provision of public goods, as private firms may not invest in their production, and consumers may not be willing to pay for them at a level that would make their provision economically viable.
Thus, the existence of pure public goods can cause market failure by leading to under-provision of goods that are socially desirable but not profitable for private firms to produce, resulting in a suboptimal allocation of resources.