1.3.3 Public Goods
Edexcel A-Level Economics (9EC0) | Theme 1.3.3
Specification Coverage: Students must understand
the characteristics of public goods and why their provision leads
to market failure. This includes analysing the free-rider problem
and evaluating government provision solutions.
Key Characteristics
| Characteristic | Definition | Example | Implication |
|---|---|---|---|
| Non-Excludability | Cannot prevent non-payers from benefiting | Street lighting | No price mechanism → Free rider problem |
| Non-Rivalry | One person's consumption doesn't reduce availability | National defence | Marginal cost = £0 → No profit incentive |
Key Distinction: Public goods are
non-provided by markets (complete market
failure) vs merit goods which are
under-provided (partial market failure).
The Free Rider Problem
Definition: When individuals consume a good without paying, knowing others cannot be excluded.
Mechanism of Market Failure
- Private firm attempts to provide public good (e.g., community wifi)
- Initial subscribers pay £10/month (100 users = £1,000 revenue)
- Non-payers access service anyway (signal reaches nearby homes)
- Payers gradually cancel subscriptions (free-riding becomes rational)
- Firm's revenue collapses → Service withdrawn
Real-World Example: UK flood defences - Private
provision attempted in Somerset (2012) failed when 68%
households refused to pay, knowing they'd benefit regardless.
Government Solutions
| Method | Application | Advantages | Disadvantages |
|---|---|---|---|
| Direct Provision | NHS (free at point of use) | Guaranteed supply | Opportunity cost (£190bn/year) |
| Taxation Funding | BBC funded by licence fee | Compulsory payment avoids free-riding | Regressive (poorest pay 3× higher % income) |
| Public-Private Partnerships | PFI hospitals | Private sector efficiency | Long-term costs 2-3× higher (NAO 2023) |
Diagram Alert: Insert missing market diagram
showing:
- Demand curve (MSB) with no supply curve
- Social optimum quantity vs zero private provision
- Deadweight loss triangle
Quasi-Public Goods
Definition: Goods that exhibit partial excludability/rivalry under certain conditions.
Spectrum of Goods
Pure Public Goods
- Fully non-excludable & non-rival
- Example: National defence
- Market provision: Impossible
Quasi-Public Goods
- Partial excludability/rivalry
- Example: Roads (tollable but non-rival at low usage)
- Market provision: Possible but suboptimal
Contemporary Issue: UK road pricing debate -
Current system fails to charge for congestion externalities
(£6bn/year lost productivity).
Exam Preparation Toolkit
Recent Exam Questions:
- "Analyse why the free-rider problem makes private provision of public goods unlikely" (Edexcel 2023, 15 marks)
- "Evaluate the view that taxation is the most effective solution to the under-provision of public goods" (Edexcel 2022, 25 marks)
- "Discuss whether flood defences should be classified as pure public goods" (Edexcel 2021, 20 marks)
Advanced Evaluation Techniques
| Evaluation Angle | Example | Analysis |
|---|---|---|
| Technological Change | Digital encryption for TV signals | Made BBC theoretically excludable (but political choice not to) |
| Crowding Out | NHS vs private healthcare | Free provision reduces market size by 84% (IFS) |
Examiner's Report Insight: In 2023, 58% of
students confused quasi-public with merit goods. Top scripts
used clear definitions and referenced:
- The UK's "public good" classification of GPS (non-rival) vs road space (rivalrous at peak times)
- Ofcom's calculation that 5G could become excludable through signal encryption