Public goods, quasi-public goods and the free rider problem

Overview

Non-excludability using street lighting, free rider problem and differences between a private good and a pure public good.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What two features must a good have to count as a pure public good?

   Model answer

   It must be non-excludable, meaning that once it is provided nobody can be prevented from consuming it whether or not they have paid. And it must be non-rival, also described as non-diminishable, meaning that one person's consumption does not reduce the amount available to anyone else. Street lighting, national defence and a flood defence wall all satisfy both conditions. A good with only one of the two features is not a pure public good.

2. 2

   Explain non-excludability using street lighting.

   Model answer

   Once a street light is switched on, every passer-by receives the light whether they contributed to the cost or not, and there is no practical way to fit a meter or a barrier that switches the light off for non-payers. The supplier therefore cannot make payment a condition of consumption. Because the good cannot be withheld, no enforceable price can be charged, and it is this feature above all that prevents a private market from forming.

3. 3

   Explain non-rivalry, and say why it means the cost of supplying one more user is zero.

   Model answer

   Non-rivalry means that when one person consumes the good, the quantity available to everyone else is undiminished: an extra ship taking a bearing from a lighthouse does not dim the beam for other ships. Because nothing is used up, serving one more consumer costs nothing once the good exists. Charging a positive price would then shut out people whose consumption costs society nothing, which is itself inefficient, and that is a second reason why private provision of such goods is problematic.

4. 4

   What is the free rider problem?

   Model answer

   A free rider is someone who consumes a good without paying for it, relying on others to fund provision. Because a public good is non-excludable, every individual can reason that the good will be supplied whether or not they contribute, and that their own contribution is too small to change the outcome. If enough people reason that way, revealed willingness to pay falls far below true willingness to pay, revenue is insufficient to cover costs, and the good is not supplied at all.

5. 5

   Why does the free rider problem produce a missing market rather than merely too little output?

   Model answer

   Because it strikes at the possibility of charging, not just at the level of the price. A private firm needs to link payment to consumption in order to earn revenue, and with non-excludability that link cannot be made, so there is no price at which supply is profitable. Demand exists in the sense that people value the good, but it cannot be expressed as effective demand in a market. The result is complete market failure, with output at zero rather than merely below the optimum.

6. 6

   Set out the differences between a private good and a pure public good.

   Model answer

   A private good is excludable, so the seller can withhold it from anyone who does not pay, and rival, so consumption by one person leaves less for others; a loaf of bread is the standard illustration. A pure public good is neither: it cannot be withheld from non-payers and one person's use does not diminish anyone else's. Because a private good can be priced and is used up, the market supplies it readily; because a public good cannot be priced and is not used up, the market does not supply it.

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