2.

9 Market failures - Public Goods

• define all the terms (AO1)

• explain public goods as being (AO2)
• non-rivalrous, non-excludable
• subject to the free-rider problem
• evaluate government intervention to provide public goods (AO3)
• direct provision
• contracting out to the private sector.

Market failure and public goods

So far we have heard about markets failing when they:
• Produce too much of a good (negative externalities)
• Produce too little of a good (positive externalities)
But what if a market produced NONE of a good. A good which is not provided by the free
market AT ALL is known as a PUBLIC GOOD.
Public Good: A good which provides benefits to society which are non-rivalrous, and the benefits of
which are non-excludable by the provider of the good. Because of these characteristics, public goods
will not be provided by the free market at all (hence, represent a market failure)
To be considered public, a good must be:
• Non-rivalrous in consumption: This means that one consumer’s enjoyment of the benefits of a
good does not diminish any other consumer’s enjoyment of its benefits.
• Non-excludable by the provider: This means that once a good has been provided, it is not possible
to exclude any individuals from enjoying its benefits. In other words, you can’t make individuals
pay for the good once it is made available. There will be free-riders, or individuals who enjoy the
good’s benefits without ever paying for it!
Examples of Public Goods
Much of what government provides us using our tax money are examples of public goods.
These may include:
• Infrastructure: Roads, sidewalks, street lights, power lines, sewage systems, train tracks… many of
these goods are non-excludable and non-rivalrous, therefore are unlikely to be provided by the free
market. Government must provide such goods so that society can enjoy their benefits.
• Parks: Think of the last time you walked through a public park. Did you have to pay to get in? (If not,
then it was non-excludable). Did your enjoyment of the park prevent others from enjoying it? (If not,
then it was non-rivalrous). Public parks are an example of public goods.
• Fire and Police Protection: If your house catches on fire, do you have to call a private fire fighting firm to
come put it out? The reason you don’t is because the benefits of having fire protection are
non-rivalrous. Putting the fire in your house out will benefit your neighbors, whose houses are less likely
to burn down. Police protection is the same way. Without government-provided police force, society as
a whole would be unsafe because very few people would choose to hire private security. The benefits of
police protection are non-rivalrous and non-excludable.
• National Defense: An army, navy and air force provide citizens with protection which, once provided,
individuals within the nation cannot be excluded from benefiting from. One person’s safety does not
diminish others’, so defense is non-excludable and non-rivalrous: a purely public good.

Direct government provision & contracting out

Public goods are directly provided by the government, are financed out of tax revenues and are
made available to the public free of charge (or nearly).
● It raises some issues of choice about (a) which public goods should be provided, and (b) in
what quantities they should be provided.
● Due to a major additional difficulty in calculating expected benefits (no price data), the
government cannot undertake cost-benefit-analysis accurately but will need to rely on a
very rough and approximate method to make choices about public goods.
● The provision of public goods is also political in nature, with different groups competing
against each other, and with government sometimes susceptible to political pressure that
influence their decisions.

Contracting out by the public sector to private sector occurs when a government makes an
agreement (or contract) with a private firm to carry out an activity that the government was
previously doing it self.
Contracting out to the private sector - advantages & disadvantages
• often done by competitive tendering resulting in the selection of a provider that can offer the
lowest cost
• usually accompanied by detailed specifications regarding the activity that will be provided with
criteria for measurement of the provider’s performance, which may allow for quality control
• provides access to a broader range of skills and technology of the private firm than the
government is likely to have available itself
• the private firm may be more flexible and innovative than the government
• due to all of the above it may be possible for the public goods provided to be better quality and
less costly.

• the government becomes less accountable for the public goods it provides.
• the government loses control over the services it has contracted out.
• the costs of contracting out may be greater than if the government had provided the public
good itself, as the contracting private firms often charge high prices for their services.
• there is a risk that quality may be reduced because competition between firms on the basis
of cost may lower the quality of the services provided.
• a risk of making a poor contract, resulting in a higher cost and lower quality
• needs to be monitored by the government, which adds to costs

Discuss the implications of the direct provision of public goods by a

government. [15]

Answers may include:

• definition of public goods
• a diagram is not required
• explanation that the non-rivalrous and non-excludable characteristics of public
goods means they will not be provided by the free market and will need to be
provided by the government
• examples of public goods
• synthesis or evaluation (discuss).
Discussion may include: consideration of the nature of public goods and whether
they have to be provided by the government. The problems of providing public
goods by the government, such as the opportunity cost of government spending
and inefficient government provision.