Public goods are non-rival and non-excludable goods. They have characteristics of non-excludability, meaning once produced their benefits cannot be confined only to those who pay. They are also non-rival, so one person's consumption does not diminish another's. Examples include national defense, street lights, and fresh air. Private markets often underprovide public goods due to free-rider problems, where people can benefit without paying. This leads to underprovision. The government can more efficiently provide public goods by charging for them through taxes to avoid these issues.

1. Public Goods
•Public goods are those goods and services which are
non rival in consumption and the users collectively
consume its benefits
• Also known as the collective consumption good

2. Characteristics of public good
Non Excludability :
• Once a public good is produced its benefits cannot be confined to
those who have paid for it
• It is not possible to exclude anyone from consuming the good or
services
• Examples: National defense, fireworks display, air traffic control,
police and fire protection

3. Non excludability

4. Characteristics of public goods
2) Non rivalry in consumption:
• One person’s enjoyment of good does not diminish another person's
consumption
• Marginal cost for supplying public good to an extra person is zero
• Examples: street lights, national defense, fresh air, police protection

5. Non rivalry

6. Characteristic of public goods
3) Non rejectable:
• If a public good is provided then in most of the cases we cannot avoid it
• Example nuclear defense system

7. Public goods and market failure
• Pure public goods are not normally provided by the private
sector because they would be unable to supply for a profit
• Public goods leads to market failure due to the missing
market

8. Free rider problem:
• Difficult to charge people from benefitting from the
goods and service
• People can benefit from a public good without paying for
the good
• Markets often have a difficult time producing public
goods because free riders attempt to use the public
good without paying for it
• Leads to under provision of a good

9. Free Rider Problem

10. Understanding free rider problem with prisoners
dilemma game
• If both contributes total benefit $20.
each gain $10 with net gain of +$4
($10-$6)
• If one contribute and another does
not then one who then total benefit
will $10 , each gains $5 but the one
who contributes will realize net gain
of -$1 and then the one who does not
pay will have net gain 0f +$5
• If neither of them contributes there
will 0 cost and 0 benefit

11. Drop in the bucket problem:
• The good or service is generally very costly that its provision
does not depend on whether any single individual pays
• Example police force

12. Should the government provide public goods?
• The non rival nature provides a strong case for the government to
provide the public goods
• Government can charge people in the form of tax
• State provision prevent under provision and under consumption of
the public goods
• Government can provide the public goods efficiently due to
economics of scale

13. Mixed goods
• Goods that part private and part public
• Example education