1.3.3 Public goods

• Public goods:


  Goods that have the characteristics of non-rivalry and non-excludability.

  E.g. street lights.
• Non-rivalry:


  Consumption of the good by one person does not reduce the amount of good available for another consumer.
• Non-excludability:


  Once the good is produced, no consumer can be prevented from consuming it.
• Free-rider problem:


  When consumers benefit from a good without paying and therefore have no reason to pay for the good.

  Because of non-rivalry and non-excludability, public goods suffer from the free-rider problem.
• Why do public goods cause market failure?

  The free-rider problem means that consumers will not be willing to pay for public goods. Therefore, no private firm will be willing to produce the good.

  Therefore, the good will be underprovided in a free market and consequently, too few scarce resources will be allocated to producing the good. This is inefficient and results in market failure.