Theme 1: Introduction to markets
and market failure
In this theme, students will consider how markets work, looking at how supply and demand interact to
allocate resources in local, national and international markets. They will learn how to apply supply and
demand analysis to real-world situations and be able to offer explanations of consumer behaviour. This
will involve looking at both how consumers act in a rational way to maximise utility and how
firms maximise profit, but also why consumers may not behave rationally.
1.3 Market failure
Subject content
1.3.3 Public goods
What students
need to learn:
a) Distinction between public and private goods using the
concepts of non-rivalry and non-excludability
b) Why public goods may not be provided by the private
sector: the free rider problem
Private goods
A good which possesses the characteristics of rivalry &
excludability
What is a Public Good?
Examples?
Key Term:
Public Goods
Goods that are collectively
consumed and have the
characteristics of non-excludability
and non rivalry.
• Non-excludability
• Situation existing where
individual consumers can not
be excluded from consumption
• Non-rivalry
• Situation existing where
consumption by one person
does not affect the
consumption of all others.
So, no firm
wants to
provide
these –
there’s no
money to
be made!
What is a Public Good?
Examples:
•
•
•
•
Defence
Judiciary & prison service
Police service
Street lighting
Examples?
Market Failure
Examples?
Key Term:
If the provision of public goods was left to
the market mechanism, there would be
market failure.
This is because of the free rider problem
What is a Free Rider?
Key Term:
Free Rider
Someone who directly
benefits from the
consumption of a public
good but who does not
contribute to its provision
and allows others to pay
for it.
Public goods and market failure
Pure public goods are not normally provided
by the private sector because they would be
unable to supply them for a profit.
It is up to the government to decide what
output of public goods is appropriate for
society.
To do this, it must estimate the social benefits
from making public goods available.
What is a Quasi-Public Good?
Key Term:
Quasi-Public Good
Goods that have
some but not all the
characteristics of a
public good.
Examples?
Remedies for Public Goods
• Government Provision: gov’t tends to provide public goods
with funds from general taxation …everyone pays … everyone
can use them
• (without gov’t provision, these goods would be
“underprovided” or not provided at all)
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