Public Goods
In one line. A pure public good is non-rival and non-excludable, so the free market under provides or fails to provide it at all. Non-excludability gives the free rider problem and non-rivalry gives a zero efficient price, both justifying government provision.
Exam relevance: the highest-yield micro theme, market failure and its correction appear almost every year, on ETG analysis. Taught the way an economics tutor who wrote the answer keys teaches it.
01What a public good is
A pure public good has two defining features that together stop the free market from supplying it, so the government usually provides it instead.
A pure public good is non-rival (one person's use does not reduce the amount available to others) and non-excludable (non-payers cannot be prevented from consuming it). It is also non-rejectable.
National defence, street lighting and a lighthouse beam are the standard examples. Note that this page carries no diagram, because the under provision is argued from the free rider and pricing logic, not drawn.
02The free rider problem
Because a public good is non-excludable, people can enjoy it without paying, so no profit seeking firm will supply it.
If a firm lit the street, every passer by would benefit whether or not they paid. Knowing this, each person waits for someone else to pay, the free rider problem, so revenue cannot be collected and the good is not provided at all.
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03Why price cannot ration it
Because a public good is non-rival, the cost of letting one more person use it is close to zero, so the efficient price is also close to zero.
A price of zero raises no revenue, so even if exclusion were possible the good would be under provided. Non-excludability gives non provision through the free rider problem; non-rivalry gives under provision through the pricing problem. Both justify government provision.
04Quasi-public goods
Most real goods only partly meet the two characteristics, and naming that precisely is where marks are won.
A road is non-rival when empty but rival once congested, and non-excludable until a toll is added. A good that only partly satisfies the conditions is a quasi-public good.
05Common misconceptions
Do not just define a public good in the abstract. Apply both characteristics to the specific good in the question, with a concrete reason for each, and name the term quasi-public good where the good is only partly public.
06Test yourself
- Explain, using non-excludability and non-rivalry, why street lighting is unlikely to be provided by the free market.
- Why is a public park a quasi-public good rather than a pure one?
Key terms on this page
Public goodNon-excludabilityNon-rivalryFree rider problemQuasi-public goodMarket failure
07Questions students ask
A pure public good is non-rival, meaning one person's use does not reduce what is available to others, and non-excludable, meaning non-payers cannot be prevented from using it. National defence and street lighting are standard examples. The free market under provides or fails to provide it at all.
Because of two problems. Non-excludability creates the free rider problem: people can consume without paying, so firms cannot collect revenue and do not supply it. Non-rivalry means the efficient price equals the near zero marginal cost of an extra user, which is unprofitable. Both point to non or under provision.
Usually not a pure one. A road can be made excludable with tolls and becomes rival once it is congested, so it only partly meets the characteristics. It is best classified as a quasi-public good, which is exactly the distinction examiners look for.