Definition

Public goods have the characteristics of being non-rivalrous and non-excludable goods that cannot be provided by the free market.

They are a market failure, which means the government needs to intervene in the market to ensure they are provided. 

Because they bring significant social benefits we also consider them to be merit goods.

Characteristics of public goods

Non-rivalrous 

Non-rivalrous means the consumption by one individual does not reduce the availability to others.

For example, if a group of people are benefiting (consuming) from a public good like street lighting and an extra person benefits from the streetlight the existing consumers will not experience a fall in benefit.  

The marginal cost (the cost of providing the good to an additional consumer) of providing a public good is zero once it is set up and produced. 

Non-excludable

Once a public good is being produced it is impossible to stop people from benefiting from it.

For example, once streetlights are turned on it is impossible to stop people from benefiting from them.

Examples of pure public goods

Examples of public goods include flood barriers, sea defences, street lighting and national defence.

Quasi-public goods have some elements of being non-rivalrous and non-excludable. Examples include roads, bridges and public parks. 

---

Free-rider problem

The free-rider problem is where people benefit from a good/service without paying for it.

Public goods are not produced in free markets because of the free-rider problem.

If people pay for a public good to be produced it would be impossible to prevent people who have not paid from benefiting from it which means some individuals free-ride on the payment of others. 

For example, a town needs a flood defence and a group of people pool their money to pay for flood defences, but they do not have enough money to pay for the barrier unless the whole town contributes.

Some people in the town choose not to contribute as they know that once the flood barrier is built they can benefit from it without paying – they would free ride on the payment of others. 

This means the market price of the flood barrier will not be high enough for it to be provided.

High set-up costs

Set-up costs are the initial capital costs of starting production.

Public goods like flood barriers often have very high initial set-up costs so even wealthy philanthropic individuals would not be able to fund their provision.

Merit goods

The lack of provision of public goods is a problem for societies because the public good has significant social benefits and it is its provision is seen as important by the government. 

State provision

Where the provision of a public good is crucial to society the government can set up and provide the public good. 

Most countries have public goods that are set up and provided by the state, such as national defence, flood defences and street lighting. 

Households pay for public goods through the tax system.

---

Advantages of state provision:

• Government provision of public goods is the only way they can be produced. 
• Governments are more likely to provide quasi-public goods near the socially efficient output.
• Governments provide public goods in the public interest. 
• Governments can provide public goods at zero price so they are available to low-income households.

Disadvantages of state provision:

• The opportunity cost of providing state-funded and managed public goods.  
• Possible inefficiency of state-run organisations that provide public goods.
• Government-provided public goods are subject to political decision-making.
• It is impossible to know the level of provision of the public good that is socially efficient.

Private sector operation

Governments can set up and pay for the provision of public goods that can then be managed by private sector organisations.

This is the case with quasi-public goods like street cleaning. 

Advantages of private sector provision:

• Operational management may be more efficient than government-managed provision.
• Private sector provision means political decision-making is less likely to take place.

The problems with this approach:

• There is an opportunity cost of setting up the provision of the public good.
• A private sector firm may provide the service, putting profit ahead of welfare.  
• It is impossible to know the level of provision to achieve the socially efficient output.

Using a real-world example, evaluate the effectiveness of state provision of public goods. [15] 

Definitions of state provision and public goods.

An explanation that government have to intervene in the market for public goods because of the on-rivalrous and non-excludable nature of public goods which leads to the free-rider problem. This means a price will not be high enough for producers in the free market to provide a public good and the state needs to step in and produce the public good.

A real-world example of how a government directly provides a public good such as the sea wall in Japan to protect the country from tsunamis.

Evaluation might cover the problems of state provision of public goods such as the opportunity cost of government expenditure in other areas and possible inefficient government management of public good provision. The answer could also consider an alternative to state provision such as state finance and private sector management in the prison sector in the US.