2.1.5

Public Goods

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Public Goods

Public goods are not provided by the free market and government intervention is needed to change this missing market.

Illustrative background for Characteristics of public goodsIllustrative background for Characteristics of public goods ?? "content

Characteristics of public goods

  • Non-rivalry: if one person consumes a good this doesn't stop another person from consuming it.
    • E.g one person gaining benefit from a street lamp doesn't stop another person from gaining benefit from it.
  • Non-excludable: someone not paying for a good doesn't affect their ability to consume it.
    • E.g not paying for a streetlamp doesn't mean you can't see when you walk down a street at night.
Illustrative background for Public vs private goodsIllustrative background for Public vs private goods ?? "content

Public vs private goods

  • Private goods exhibit both excludability and rivalry.
    • E.g a phone is a private good.
    • If I purchase a particular phone, that means someone else cannot have that phone (rivalry).
    • If I do not pay for the phone, I cannot have the benefits of the phone (excludable).
Illustrative background for Quasi-public goodsIllustrative background for Quasi-public goods ?? "content

Quasi-public goods

  • A public good can start to have private characteristics and become quasi-public.
    • E.g putting a tollbooth on a road makes it excludable, and so a quasi-public good.
Illustrative background for Public goods and market failureIllustrative background for Public goods and market failure ?? "content

Public goods and market failure

  • The private sector rarely provides true public goods (as there is little financial incentive to).
  • The government must intervene and decide the suitable quantity of public goods for society. To do so, the government has to guess the marginal social benefit (which may be inaccurate).

The Free-Rider Problem

The reason public goods are not provided by the free market is because of the free-rider problem.

Illustrative background for The free-rider problemIllustrative background for The free-rider problem ?? "content

The free-rider problem

  • It is impossible to exclude the benefits of a public good from someone.
  • As a result, people that don't pay for the product will receive the same benefit as those that do.
  • This disincentivises people from producing a good in the free market because of the free riders who receive the benefit without paying.
  • This is a market failure.
Illustrative background for Pricing public goodsIllustrative background for Pricing public goods ?? "content

Pricing public goods

  • It is hard to price a public good.
  • Producers may overvalue the product and consumers undervalue.
  • This further discourages the production of public goods in the free market.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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