Characteristics of Public Goods

Public goods possess two defining characteristics that prevent their provision by the free market.

Non-excludability: it is impossible or extremely costly to prevent non-payers from consuming the good once it is provided.

This means you cannot easily stop someone benefiting from goods such as street lighting or national defence.

Non-rivalry: one person's consumption does not reduce the amount available for others.

The marginal cost of supplying an additional user is zero, for example when another person watches a firework display.

The Free Market Problem and the Free Rider Issue

Because public goods are non-excludable, firms cannot use the price mechanism to charge users.

This creates the free rider problem, where individuals have no incentive to pay because they can benefit from the good without contributing.

They may assume that someone else will pay while they still receive the benefit.

Consequence: if everyone behaves as a free rider, no one pays.

Private firms therefore have no profit incentive to supply public goods, leading to their complete under-provision or non-provision, which is a clear market failure.

Government Provision

Because of this market failure, public goods are typically provided by the government and financed through taxation.

This ensures that society benefits from goods that are socially desirable but unprofitable for the private sector to provide.

Examples: national defence, street lighting, lighthouses, public parks, and basic scientific research.

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