Public Goods and Market Failure

Public goods provide an example of market failure resulting from missing markets. Which goods and services are best left to the market? And which are more efficiently and fairly provided as collective consumption goods by the state? This is at the heart of your revision of public goods.

Central to your revision will be to understand why public goods may not be provided by the market. You can work this out by distinguishing between public and private goods and focusing on the ideas of rivalry and excludability in consumption.

Students should understand the free rider and valuation problems – there are big debates in economics about the optimum size of the state. Rapid changes in technology are also changing the nature of what is and what is not a public good.

What are the main characteristics of pure public goods?

The characteristics of pure public goods are the opposite of private goods:

Non-excludability: The benefits derived from pure public goods cannot be confined solely to those who have paid for it. Indeed non-payers can enjoy the benefits of consumption at no financial cost – economists call this the 'free-rider' problem. With private goods, consumption ultimately depends on the ability to pay
Non-rival consumption: Consumption by one consumer does not restrict consumption by other consumers – in other words the marginal cost of supplying a public good to an extra person is zero. If it is supplied to one person, it is available to all.
Non-rejectable: The collective supply of a public good for all means that it cannot be rejected by people, a good example is a nuclear defence system or flood defence projects.

There are relatively few examples of pure public goods.

Examples include flood control systems, some of the broadcasting services provided by the BBC, public water supplies, street lighting for roads and motorways, lighthouse protection for ships and also national defence services.

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