This updated revision presentation provides an introduction to the concept of public goods.

1. Public Goods
and Market
Failure
AS Economics
2013

2. Will the market supply?
• Businesses in the private sector may not
provide public goods – leading to market failure
• It is important to distinguish between private
and public goods
• And to understand why the market may not
offer some public goods!
• In which case there is an argument for
collective provision by the government

3. Characteristics of Private Goods
• What are private goods?
• Private goods are excludable
– Consumers of private goods can be
excluded from consuming the product if
they are not willing or able to pay for it
– For example - a ticket to the theatre or a
sports event or a meal in a restaurant
– If you don’t pay – you don’t consume and
benefit from the good or service!

4. Excludability: Charging the User

5. Private Goods
• Private goods are rival
– One person's consumption reduces the amount
left for others to consume
– Scarce resources are used up in producing and
supplying the good or service
– There is an opportunity cost
– The marginal cost of supply is positive
– Therefore we can justify charging a price
• Private goods are rejectable
– Private goods can be rejected

6. Rivalry in consumption
An “All you can eat buffet” – why
is this a private good?

7. Public and Private Goods at the Races!
Consider the nature of excludability and
rivalry of consumption at a racecourse

8. Common grazing land / fisheries – a
public good? Sustainable?
Common access (free for all)
natural resources often suffer what
is known as the Tragedy of the
Commons – what does this mean?

9. What are Public Goods?
• Pure public goods have three main
characteristics:
• Non-excludability:
– The benefits of public goods cannot be
confined to those who have paid for it
– Non-payers can enjoy the benefits of
consumption at no financial cost to them
– These people are known as “free-riders”

10. Non-Excludability

11. Non-Rival Consumption

12. Flood defence – are there aspects of
a public good with this?

13. The Free Rider Problem
• Markets work best when goods and services are
private – they are rival and excludable
• Consumers have an incentive to not reveal their
willingness and ability to pay for public goods if they
believe that they will be expected or required to
contribute to financing the public good
• Good examples to use include TV Licence dodgers
and people who choose to evade Council Tax but
who still receive local authority services

14. Spot the free rider!
If we can make the good
excludable in some way, the
free market could provide the
good, as now people have an
incentive to reveal their true
willingness to pay, since they
can no longer free ride

15. A tandem example of free-riding

16. Public Goods
• Non-rivalry in consumption:
– Consumption of a public good by one person does
not reduce the availability of a good to others
– In other words, if the good is provided for one
person it must be provided for others
– The amount of the good I enjoy has no affect on
the amount you enjoy
• Non-rejectable nature of public goods
– If a public good is provided, in most cases we
cannot avoid it e.g. Nuclear defence for a nation

17. Pure Public Goods
• Pure public goods are also known as collective
consumption goods
• National Defence Systems
• Sewage and Waste Disposal Systems
• Lighthouse Protection
• National Rail Safety Systems
• A well functioning legal system
• Good air quality
• Street Lighting
• Firework Displays
• Flood defence systems

18. Semi-Public (Quasi) Public Goods
• Quasi public goods are products / services that are
public in nature, but do not exhibit fully the features of
non-excludability and non-rivalry
• They may become non-rival e.g. at peak times when
congestion occurs

19. Semi-Public (Quasi) Public Goods
– There is an element of excludability or rivalry in
consumption
– Examples might include:
• Motorways and major roads
• Parks and other public attractions
• Refuse collection and disposal?
• Terrestrial television (public service
broadcasting)
• Police Force protection
• Museums such as the British Museum
• Radio frequencies

20. Beaches – Rivalry and Excludability

21. Peak Times

22. Making a quasi public good
excludable – road and bridge tolls

23. Online courses – information as a
public good – but what about exams?
What are the motivations
for putting courses online
for free?
Is the market making a
private good a public
good?

24. Paying for public goods
• Markets cannot provide the incentives needed
to supply essential services such as policing
and defence causing allocative inefficiency
• Hence public goods are provided collectively by
government and financed through general
taxation or other forms of charge e.g. The BBC
licence fee

25. Can the private sector provide public
goods?
• Yes
• Groups of neighbours pay voluntarily pay for
local security patrols at night
• Because they value the public good nature of
the service highly
• Voluntary donations to organisations providing
public services – examples of altruism
• Is altruism a reversal of self interest?

26. Why does the state provide public goods?
1. On grounds of equity – so that people on all levels of
income can have access to them
– Providing on grounds of need rather than ability to pay
2. On grounds of efficiency
– Easier to provide them collectively
– Economies of scale from providing to all?
3. To overcome the free-rider problem and the failure
of the market to provide sufficient public goods
– One basic purpose of government is to provide goods
that market forces will not
4. Even thought the state may finance these goods –
others can provide them at the point of need

27. Valuation of Public Goods
• How much are we willing / able to pay for public
goods to be provided?
• Can be hard to construct a social demand
curve – users may exaggerate the benefits
• The democratic process is imperfect
• Government often influenced by lobbying
• Who actually benefits? Who pays?
• Should people who benefit directly make a
contribution?

28. What if public goods are provided for
free to users?
• Demand will expand along the demand curve
• Some will overstate their demand for a service
and over-come it – putting pressure on public
finances and creating excess demand
• Putting a price on a public good means that
users make some contribution towards cost
• But the price should reflect the marginal benefit
that people get from the service
• BBC licence fee - too high or too low?

29. Public Goods and the Prisoner’s Dilemma
– using a bit of Game Theory

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