2.9 Market Failure: Public Goods

This chapter is so short that there is just this one page.

Public Goods (AO2)

Public goods are ones that are non-excludable and non-rivalrous:

• Non-excludable: People can not be excluded from accessing the good, hence non-payers can use the good as well. 

• Non-rivalrous: One person's consumption does not hinder another person from using it as well. 

• Examples of public goods: National defense, parks, streetlights, and Wikipedia.

Because you can't prevent non-payers from using it, there is little incentive for companies to provide such goods. 

This is referred to as the free-rider problem: Because firms are not guaranteed being paid, there will be an underprovision of the public good. For example, there are few privately funded parks because where is the profit to be made. 

That is, unless the government intervenes:

Government Intervention in Response to Public Goods (AO3)

The government is usually the one that provides public goods because of the lack of incentives for private firms. It can do this in two different ways:

• Direct provision: The government can directly supply the public goods. For example, they build parks and provide streetlights.

• Contracting out to the private sector: Instead of directly supplying, the government can pay private firms to do it for them. For example, much of national defense spending goes to companies like Lockheed Martin and Boeing, who then ensure the military has proper planes and rockets.