Public Goods and Market
Failure
AS Economics
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AS Economics
PowerPoint Briefings 2006
Introduction
• Businesses in the private sector of the
economy may not provide public goods –
leading to market failure
• It is important to distinguish between private
and public goods
• And to understand why the market may not
offer public goods!
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Characteristics of Private Goods
• What are private goods?
• Private goods are excludable
– Consumers of private goods can be
excluded from consuming the product if
they are not willing or able to pay for it
– For example - a ticket to the theatre or a
sports event or a meal in a restaurant
– If you don’t pay – you don’t consume and
benefit from the good or service!
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Private Goods
• Private goods are rival
– One person's consumption reduces the
amount left for others to consume
– Scarce resources are used up in
producing and supplying the good or
service
– There is an opportunity cost
• Private goods are rejectable
– Private goods can be rejected
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Private Goods
Private goods
and service are
rival and
excludable
The private sector
can supply private
goods because
they can charge
consumers and
make a profit
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Digital “pay per view” – an excludable
private good – a growing market too!
Movies
Sporting
events
News
Internet
services
Repeat TV
Online
libraries
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What are Public Goods?
• Pure public goods have three main
characteristics:
• Non-excludability:
– The benefits of public goods cannot be
confined to those who have paid for it
– Non-payers can enjoy the benefits of
consumption at no financial cost to them
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Public Goods
• Non-rivalry in consumption:
– Consumption of a public good by one
person does not reduce the availability of
a good to others
– In other words, if the good is provided for
one person it must be provided for others
• Non-rejectable
– If a public good is provided, we cannot
avoid it
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Public Goods?
The benefits of water filtration systems, the
enjoyment from a fireworks display, the light
for passing ships from a lighthouse – are
these examples of pure public goods?
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Goods and services – public or private?
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The Forth Road Bridge
Mass MMR vaccination programme
The Fire Service
The Police Service
National nuclear defence system
Analogue broadcasting services
Pay per view television provided by Sky TV
Street lighting
Air waves / radio spectrums
The M25 motorway on a quiet Sunday morning
The M6 Toll Road
Ticket to Chelsea v Barcelona in the Champion’s League
A large scale fireworks display in a local town
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Pure Public Goods
• Pure public goods are also known as
collective consumption goods
• National Defence Systems
• Sewage and Waste Disposal Systems
• Lighthouse Protection
• National Rail Safety Systems
• Street Lighting
• Firework Displays
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Semi-Public (Quasi) Public Goods
• These are products that are public in nature,
but do not exhibit fully the features of nonexcludability and non-rivalry
• They may become non-rival e.g. at peak
times when congestion occurs
• On grounds of equity the government may
provide these goods directly and finance
them through general taxation
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Semi-Public (Quasi) Public Goods
– There is an element of excludability or rivalry in
consumption
– Examples might include:
• Motorways and major roads
• Parks
• Terrestrial television (public service
broadcasting)
• Police Force protection
• Galleries and Museums
• Airwaves
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Are beaches pure public goods?
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What about the air waves?
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Auction of mobile phone licences
• In 2000 the UK government auctioned off five
licences for 3rd generation mobile phones
• In total, telecoms companies bid £22 billion!
• They are now saddled with huge debts
• Did the government have the right to sell off
what people perceive to be a public good?
• Or are air waves a commodity like everything
else?
• An example of the “winner’s curse”?
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Why does the state provide public goods?
• On grounds of equity – so that people on all
levels of income can have access to them
– Provision on grounds of need rather than
ability to pay
• On grounds of efficiency
– Easier to provide them collectively
– Economies of scale from providing to all?
• To overcome the free-rider problem
• To correct for market failure – the failure of
the market to provide sufficient public goods
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The Free Rider Problem
• Markets work best when goods and services
are private – they are rival and excludable
• Consumers have an incentive to not reveal
their willingness and ability to pay for public
goods if they believe that they will be expected
or required to contribute to financing the public
good
• Good examples to use include TV Licence
dodgers and people who choose to evade
Council Tax but who still receive local authority
services
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The Free Rider Problem
• Another example might be a group of residents
in a block of flats who all stand to benefit from
better lighting and security systems, but who
individually might try to avoid payment and
benefit once the improved amenities are in
place
• Given the nature of the free rider problem,
public goods are often financed through some
form of enforcement, notably the compulsory
nature of the TV Licence fee
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Paying for public goods
• Markets cannot provide the incentives needed
to supply essential services such as policing
and defence causing allocative inefficiency.
• Hence public goods are provided collectively by
government and financed through general
taxation or other forms of charge e.g.. The BBC
licence fee.
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Public bads
• Environmental damage and global warming
affects everyone – no one is excluded from the
disbenefits of others polluting economic activity
• Incidences of this are called public bads
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