2.9 Market failure - public goods

• Public goods are non-rivalrous and non-excludable. Because the free market is unable to provide these goods without intervention, public goods are an example of market failure. Eg. fish, park benches
• The free-rider problem exists because no one is willing to pay for a good or service when they think that somebody else will pay for it. This is why the goods will not be provided by the free market.
• Governments charge consumers through taxation.
• With any large-scale investment by the government, there will always be an opportunity cost associated with the decision to provide public goods.
• Advantages of government provision:

  • improves social welfare as consumption is increased
  • eliminates the free-rider problem
  • can be more efficiently provided
• Disadvantages of government provision:

  • has to be financed, which generates an opportunity cost
  • may not be economically efficient, as the government can't determine the optimal output
  • some partly public goods could be provided more efficiently by private firms
• The government can pay the private sector to provide the good, rather than providing it directly themselves. The private sector can be more efficient than the government.