The document discusses the concept of public goods, defined as goods that are both non-rivalrous and non-excludable, leading to market failures such as the free rider problem. It emphasizes the necessity of collective funding for public goods to be provided, as individuals are unlikely to pay due to the ability to access them for free. Additionally, it distinguishes between public goods and quasi-public goods, highlighting the social benefits and the importance of achieving social optimum for maximizing welfare.

1. Public Goods
Lower 6th Micro
Market Failures

2. Intro to Public
Goods
Public Goods
Mr O’Grady

3. Intro to Public Goods
Definition: When a good is both non-rivalrous and non-excludable in consumption.
Non-rivalrous: Where use of the good by one individual does not reduce the amount of the
good available for others to use.
E.g. A pedestrian’s use of streetlights does not prevent the next pedestrian from using them too.
Non-excludable: Where it is not possible to prevent people from consuming the good once
the good is provided.
E.g. It is not possible to stop one person from accessing street lighting whilst others are able to use it.
Free Rider Problem: In a free market, no one would ever pay for a public good, as
they are able to access and use them for free.
Hence the good would not be made as producers couldn’t profit. Complete market failure.
Taxes and direct provision are required for the good to be provided.
Quasi-Public Good: A good which is either non-rivalrous but excludable, or non-
excludable but rivalrous in consumption.
E.g. A toll road. Non-rivalrous, but excludable.
N.B. a public good can temporarily become rivalrous should there be over-crowding of the
resource (imagine a beach so crowded there’s nowhere to put down your stuff!)

4. Under-Provision
of Public Goods
(Marginal
Analysis)
Public Goods
Mr O’Grady

5. Under-Provision of Public Goods
Private Benefits: A public good benefits all individuals
So there is some price that an individual would pay for the
good and hence a demand curve, derived from MPB
The WTP is low due to the free rider problem – why pay for a
good one can access for free once it is provided?
Costs: No individual’s gain is sufficiently high enough for
them to pay the cost for the good to be provided
MPB<MPC at all quantities
Price
Quantity
D = MPB
S = MPC
= MSC
MSB
QSO
PSO
Free-market result: Complete market failure occurs. No equilibrium (QFM=0).
Social Benefit: The benefit to society of a public good exceeds that to an individual
As the good is non-rivalrous and non-excludable, all individuals benefit once it is provided
E.g. whilst one streetlight might provide £10 worth of welfare to any single resident on a
street, on a street of 100 identical residents, it provides £1000 worth of benefits!
Social Optimum: Occurs where the MSB is equal to the MSC (QSO)
The benefit to all, of the final unit made is equal to the cost of making the final unit
QSO should be consumed to maximise welfare, society should collectively pay PSO per unit

6. Under-Provision
of Public Goods
(No Marginal
Analysis)
Public Goods
Mr O’Grady

7. Private Demand: A public good benefits an individual
There is some price that an individual would pay for the good
and hence a demand curve, D0 (=MPB)
But WTP is low due to the free rider problem – why pay for a
good one can access for free once it is provided?
Supply: Supply (S) for the good is relatively low, as often
public goods is costly to provide (e.g. National defence)
Price
Quantity
D0
S
D1
QSO
PSO
Free-market: Complete market failure occurs. A missing market (QFM=0)!
Social Demand: the demand of society can be thought of as the sum of all private
demand, as all individuals can benefit once the public good is provided, D1 (=MSB)
D1 shows what society would be willing to pay if individuals would split the price.
E.g. whilst one streetlight on a road provides £10 worth of welfare to any single resident, on a
street of 100 identical residents, together they would be willing to pay up to £10,000.
Social Optimum: Occurs where D1 is equal to the S
The benefit to all, of the final unit made is equal to the cost of making the final unit
Q should be consumed to maximise welfare, society should collectively pay P per unit
Under-Provision of Public Goods

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