1.3.3 Public goods

• Public goods


  Goods missing from the free market, but they offer benefits to society
• Public goods


  • Street lights
  • Flood control systems
• Public goods


  • Non-excludable - consuming the good does not prevent others from consuming it
  • Non-rival - the benefit others get from the good does not diminish if more people consume it
• Free-rider problem


  People who do not pay for the good still receive benefits from it, in the same way people who pay for the good do
• Public goods are underprovided by the private sector because they do not make a profit from providing the good since consumers do not see a reason to pay for the good, if they still receive the benefit without paying
• Public goods are also underprovided because it is difficult to measure the value consumers get from public goods, so it is hard to put a price on the good. Consumers will undervalue the benefit, so they can pay less, whilst producers will overvalue, so they can charge more
• Governments provide public goods

  They have to estimate what the social benefit of the public good is when deciding what output of the good to provide. They are funded using tax revenue, but the quantity provided will be less than the socially optimum quantity
• Private goods


  Rival and excludable - a chocolate bar can only be consumed by one consumer, and private property rights can be used to prevent others from consuming the good
• Quasi (non-pure) public goods


  Have characteristics of both public and private goods, and are partially provided by the free market
• Quasi (non-pure) public goods

  • Roads - semi-excludable through tolls, and semi-non-rival as consumers can benefit from the road whilst other consumers are using it (unless it is rush hour)