Lecture Notes: Public Goods and Market Failure

Introduction to Public Goods

• Goods like flood defenses, road signs, streetlights, roads, beaches, traffic lights, lighthouses, military defense are provided by the government.
• These are not provided through the market mechanism.
• Public Goods: They have two fundamental characteristics:
  • Non-excludable
  • Non-rival

Characteristics of Public Goods

• Non-excludability:
  • No price can be charged to exclude non-payers.
  • Benefits cannot be confined just to paying individuals.
  • Pricing might be too costly or inefficient.
• Non-rivalry:
  • Consumption by one individual does not reduce availability for others.
• Contrasts with private goods (e.g., chocolate bar) which are excludable and rival.

Examples of Public Goods

• Streetlights:
  • Non-excludable: Everyone benefits once it is lit.
  • Non-rival: Consumption does not diminish availability.
• Beaches:
  • Non-excludable: Costly to restrict access.
  • Non-rival: Space remains available despite usage.

Free Rider Problem

• Individuals can benefit without contributing.
• Leads to no private contribution towards public goods.
• Results in no supply of public goods in a free market due to lack of profit motive.
• Leads to market failure: A missing market despite high demand.

Government Provision

• Typically, governments must supply public goods through tax revenue.
• Considerations for private provision:
  • Evaluation of quasi-public goods.

Quasi-Public Goods

• Sometimes exhibit characteristics of both public and private goods.
• Can be excludable or rival under certain conditions.
• Examples:
  • Roads:
    • Excludable through tolls and technology (e.g., electronic road pricing).
    • Rival during peak congestion times.
  • Beaches:
    • Excludable if privately owned (e.g., by a hotel).
    • Rival during high congestion periods.

Role of Technology

• Helps in making goods excludable or cost-effective to manage.
• Could transform public goods to private goods.

Conclusion

• Understanding public goods and their impact on market failure.
• Possibilities of private provision through evaluation and technology.
• Emphasis on the importance of evaluating goods to explore private provision options.