Market Failure: Public Goods
Public goods are characterised by two key properties: non-excludability (impossible to prevent non-payers from consuming) and non-rivalry (one person's consumption does not reduce availability for others). These properties lead to the free rider problem — individuals have no incentive to pay voluntarily, causing the private market to under-provide or not provide the good at all. The government must step in as the provider.
Key Terms & Definitions
Non-excludable
It is impossible (or prohibitively costly) to prevent non-payers from consuming the good.
Non-rival
One person's consumption of the good does not reduce the amount available for others.
Pure Public Good
A good that is both perfectly non-excludable and non-rival. E.g., national defence, lighthouses, street lighting.
Free Rider Problem
When individuals benefit from a public good without contributing to its cost, leading to market under-provision.
Quasi-Public Good
A good that has some characteristics of a public good but not perfectly so. E.g., roads (can become congested = rival), parks (can be fenced = excludable).
Merit Good
A good that is under-consumed when left to the market because individuals underestimate its benefits. E.g., education, healthcare.
IB Diagram
Accurate IB-style diagram — straight lines, labelled axes
IB Diagram
Positive Consumption ExternalityIB standard: straight lines · P on Y-axis · Q on X-axis · labels at end of curves · dashed drop lines to axes