Since most goods are rivalrous and excludable, it

this tell you about the allocation of resources

follows that most goods are private goods.
achieved by the market when there is a positive
consumption externality? (d) Show the welfare
loss created by the positive consumption A public good has the following two characteristics:
externality in your diagram, and explain what
It is non-rivalrous; its consumption by one person
this means.
does not reduce consumption by someone else.
2 Provide some examples of positive production
externalities. It is non-excludable; it is not possible to exclude
someone from using the good.
3 For each of the examples you provided in
question 2, explain some methods that could be
used to correct the externality. Goods that are non-rivalrous and non-excludable
4 How does a positive consumption externality are also known as pure public goods. For example, a
differ from a positive production externality? lighthouse is non-rivalrous, because its use by one
5 (a) Explain the meaning of a merit good, and person does not make it less available for use by
provide examples. (b) How can underprovision others. Also, it is non-excludable, because there is no
of merit goods be corrected? way to exclude anyone from using it. Other examples
of public goods include the police force, national
6 What policy options are available to
defence, flood control, non-toll roads, fire protection,
governments wishing to correct a positive
basic research, anti-poverty programmes and many
consumption externality?
others.
7 Discuss advantages and disadvantages of the
policy measures that governments can use to Public goods and the free rider problem
correct positive externalities of production and
consumption.  Explain, with reference to the free rider problem, how the
lack of public goods indicates market failure.

5.5 Lack of public goods How do public goods relate to market failure? In the
case of excludable goods, it is possible to prevent
Market failure and public goods people from buying and using a good simply
by charging a price for it; those who do not pay
Public goods versus private goods: rivalry the price do not buy it and do not get to use it.
and excludability Therefore, private firms have an incentive to provide
excludable goods because they can charge a price
 Using the concepts of rivalry and excludability, and for them, and therefore can cover their costs. Non-
providing examples, distinguish between public goods excludable goods differ: if a non-excludable good
(non-rivalrous and non-excludable) and private goods were to be produced by a private firm, people could
(rivalrous and excludable). not be prevented from using it even though they
would not pay for it. Yet no profit-maximising firm
To understand what public goods are, it is useful to would be willing to produce a good it cannot sell at
consider the definition of private goods. A private some price. As a result, the market fails to produce
good has two characteristics: goods that are non-excludable, giving rise to resource
misallocation, as no resources are allocated to the
• It is rivalrous: its consumption by one person
production of public goods.
reduces its availability for someone else; for
example, your computer, textbook, pencils and
clothes are rivalrous, because when you buy them, Public goods illustrate the free rider problem,
another person cannot buy the same ones; most occurring when people can enjoy the use of a good
goods are rivalrous. without paying for it. The free rider problem arises
• It is excludable: it is possible to exclude people from non-excludability: people cannot be excluded
from using the good; exclusion is usually achieved by from using the good. Public goods are a type of
charging a price for the good; if someone is unwilling market failure because due to the free rider problem,
or unable to pay the price, he or she will not have the private firms do not produce these goods: the
benefit of using it; most goods are excludable. market fails to allocate resources to their production.

Chapter 5 Market failure 119

Quasi-public goods (public goods good. (Remember the market price of a good reflects
that are not ‘pure’) the benefits consumers receive and so reveals its
Some goods do not fit neatly into the category of value to consumers.) Therefore, the government can
private goods or public goods. They can be considered use the market price of private goods with positive
to be ‘impure’ public goods, also known as ‘quasi- externalities to estimate benefits and their value to
public goods’. These goods are: consumers, but with public goods there is no such
possibility as they are not produced by the market
• non-rivalrous (like public goods), and
(private firms) and have no price.
• excludable (like private goods). This means the government must try to estimate the
Examples include public museums that charge an demand (or ‘price’) of public goods through such means
entrance fee and toll roads. All these are excludable as votes or surveys of people who are asked how much a
because consumers must pay to use them. Since the good would be worth to them. This information is used
price system can be made to work here to exclude in cost–benefit analysis, which compares the estimated
potential users, they could be provided by private firms. benefits to society of a particular good with its costs. If
However, they all have very large positive externalities, the total benefits expected to arise from a public good
thus justifying direct government provision. are greater than the total costs of providing it, then the
good should be provided. If benefits are less than costs,
Correcting the market’s failure to then the good should not be provided. Assuming that
provide public goods cost–benefit analysis indicates a public good should be
provided, the decision on how much of it to provide is
Implications of direct made by comparing marginal benefits with marginal
government provision costs: the public good should be provided up to the
point where MB = MC.
 Discuss the implications of the direct provision of public Whereas the costs of providing a public good are
goods by the government. relatively easy to estimate, there are clear difficulties
in estimating benefits. A major difficulty arising with
We have seen that the market fails to allocate surveys is that people who really want something are
resources to the production of public goods. This likely to exaggerate its value. Therefore, cost–benefit
means the government must step in to ensure that analysis is a very rough and approximate method used
public goods are produced at socially desirable levels. to make choices about public goods.
Thus public goods are directly provided by the
government, are financed out of tax revenues and are
made available to the public free of charge (or nearly
free of charge).
Government provision of public goods raises some Test your understanding 5.7
issues of choice about (a) which public goods should 1 (a) Explain the meaning of rivalry and
be provided, and (b) in what quantities they should excludability. (b) How do these concepts relate
be provided. These issues are similar to what was to the distinction between public goods and
noted above in connection with direct government private goods?
provision and subsidies for goods with positive
2 Provide some examples of public goods, and
externalities (page 118). Limited government funds
explain how they relate to the concepts of
force choices on what public goods to produce, and
rivalry and excludability.
each choice has an opportunity cost in terms of other
goods and services that are foregone (or sacrificed). 3 (a) What are quasi-public goods?
Here, too, the government must use economic (b) How can they be defined in terms of rivalry
criteria to decide which public goods will provide the and excludability?
greatest social benefits for a given amount of money 4 Use the concept of resource allocation and the
to be spent on providing the goods. However, in free rider problem to explain how public goods
the case of public goods, governments face a major are a type of market failure.
additional difficulty in calculating expected benefits. 5 (a) How do governments respond to the lack of
With private goods that are provided or subsidised public goods? (b) What are the implications of
by the government, it is possible to make estimates direct government provision?
of expected benefits by using the market price of the

120 Section 1: Microeconomics