Syllabus points
- Define public goods using non-rivalry and non-excludability.
- Explain the free-rider problem and why markets under-provide public goods.
- Explain direct government provision as a response.
What is a public good?
A public good has two features:
- Non-rivalry — one person's consumption does not reduce the amount available to others.
- Non-excludability — once provided, no one can be prevented from benefiting.
Classic examples are national defence, street lighting and flood defences. Because of these features, private firms cannot easily charge users, so they will not supply the good even though society values it — a market failure of missing markets.
The free-rider problem
Because a public good is non-excludable, each person can enjoy it without paying — they can "free ride" on others. If everyone free rides, no one pays, and the good is not provided by the market at all. This is why private provision fails.
Non-excludable → people free ride → firms cannot charge → the market provides too little or none → government must step in.
Key definitions
| Term | Exam-ready definition |
|---|---|
| Public good | A good that is non-rival and non-excludable in consumption. |
| Free rider | Someone who benefits from a good without paying for it. |
| Direct provision | Government supplying a good itself, funded by taxation. |
Public goods vs merit goods
Do not confuse them. A merit good (e.g. education) is rival and excludable but under-consumed because people undervalue its private and external benefits. A public good is non-rival and non-excludable — the market will not supply it at all without intervention.
Government response
Governments usually fund public goods through direct provision, paying for them out of taxation. Challenges include deciding how much to provide (no market prices to signal demand) and the opportunity cost of the spending.
Worked example
A coastal town needs a flood defence. It is non-rival (protecting one home protects the street) and non-excludable (you cannot exclude a household behind the wall). No private firm can charge effectively, so residents free ride and the market provides nothing. The government funds it through taxation, weighing the cost against other public spending.
Common exam mistakes
- Calling education or healthcare "public goods" — they are usually merit goods (excludable and rival).
- Saying public goods are simply goods "provided by the public sector".
- Ignoring the valuation problem and opportunity cost of provision.
Exam technique
State both characteristics, explain the free-rider chain, then evaluate provision (funding cost, valuation difficulty, opportunity cost). Distinguish clearly from merit goods.
Quick revision
- Public good = non-rival + non-excludable.
- Free-rider problem → market provides too little/none.
- Government uses direct provision funded by tax.