Public Goods

Section 1: Understanding Public Goods

  • A public good is a commodity or service that is made available to all members of a society, regardless of their ability to pay for it. It is typically provided by the government.
  • Public goods are characterised by being non-excludable and non-rivalrous. Non-excludable means that individuals cannot be prevented from consuming the good, and non-rivalrous means that one individual’s consumption does not reduce availability for others.
  • Examples of public goods include street lighting, defence, roads, and public parks. Public goods often bring about positive externalities or benefits to society.

Section 2: Issues with Public Goods

  • There is often a free rider problem associated with public goods. Because these goods are non-excludable, some individuals might take advantage of them without paying taxes or contributing to their provision.
  • The provision of public goods can also lead to issues of resource allocation, as it entails deciding on the amount to be produced and allocated to the goods, often in the face of scarce resources.
  • It can be difficult to assess the optimum level of provision for public goods, as their consumption does not provide signals of demand in the same way as privately consumed goods.

Section 3: The Role of Government in Public Goods

  • As public goods are typically undersupplied by the market, it’s often the role of the government to provide these goods to ensure societal welfare.
  • By using public funding through taxation, the government attempts to solve the free rider problem and ensure that everyone can benefit from these goods.
  • The government’s role in public good provision also includes assessing the value of these goods to society and calculating costs to determine the optimal level of provision.

Section 4: Public Goods and Market Failure

  • The failure of markets to adequately provide public goods is an example of market failure.
  • This is due to two main reasons: the non-rivalrous and non-excludable nature of public goods, leading to the free-rider problem, and the inability of the market to signal demand through consumption.
  • Public goods are a justification for government intervention to correct this market failure and promote societal welfare.