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
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
Non excludability
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

Non rivalry
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

 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
 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
Free Rider Problem
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
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
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
 Mixed goods
• Goods that part private and part public
• Example education