Market Failure
5.5 Lack of Public Goods
Private Goods:
● Are Rivalrous: its consumption by one person reduces its availability for someone else.
● Are Excludable: it is possible to exclude someone else from using the good, by charging
a price for the good. If someone is unable to pay, they will be excluded from using it.
Most goods are private.
Public Goods are Non- Rivalrous and Non- Excludable.
Ex: lighthouse, police force, national defense, etc.
Public Goods and the Free Rider Problem
The free-rider problem occurs when people can enjoy the use of a good without paying for it. It
rises from non- excludability: people cannot be stopped from using the good even though they
didn’t pay for it.
Public goods are a type of market failure because due to the Free Rider Problem, private firms
do not produce these goods. The market fails to allocate resources to its production.
Quasi- Public Goods
Goods that are non- rivalrous (Public) and Excludable.
Ex: Public museums and toll roads.
Since the price system works here, they can be made available by private firms. However, the
positive externalities for these are large, thus justifying government provision.
Correcting the market’s failure to provide Public Goods
Implications of direct government provision…
The market fails to allocate resources to the production of public goods. Public goods are
directly provided by the government and directly financed out of tax revenues, made available to
the public (almost) free of charge. This raises questions about (a) what goods should be
provided and (b) how much quantity they should be provided. Each good has an opportunity
cost, and economic factors must be used to decide.
Governments face a problem in calculating the expected benefits. With a private good, it is
possible to make estimates of expected benefits using the market price, but with public goods
this is not possible as they are not produced by private firms and have no price.
The govt. Tries to estimate the demand (or price) of public goods through votes/ surveys-
cost-benefit analysis. If the benefits are greater than the costs, good should be provided, and
vice versa. The good should be provided up to a point where MC= MB.
, However, cost-benefit analysis is a rough approximation as people who really want something
are likely to exaggerate its value.
Common access resources and environmental sustainibility
Common access resources are resources that are not owned by anyone, do not have a price,
and are available to anyone without payment.
Ex: clean air, lakes, rivers, biodiversity, hunting grounds, ozone layer, etc.
Common access resources are Rivalrous and Non- Excludable, which poses threats to the
environment. Rivalry makes goods less available for others and Non- Excludability (not possible
to exclude people from using it: no price) means that since they have no price, consumers and
producers use them abundantly and may overuse them.
Ex: overfishing, desertification, overgrazing, etc.
Sustainability is the ability of something to be maintained or preserved over time. It refers to
lack of destruction, and humankind’s ability to provide g&s to satisfy needs & wants in the future.
There should be a balance between environmental and economic goals of society; Economic
growth that does not deplete or degrade natural resources.
Sustainable development- a development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
Pollution of Affluence v/s Pollution of Poverty
Pollution of Affluence- the environmental degradation that rises from industrial production and
high- income production that involves heavy use of fossil fuels and open access resources.
Pollution of Poverty- economic activities pursued by very poor people in an effort to survive.
Pollution of Affluence and Sustainability
Negative Externalities- the problem of overuse of common access resources and its effect on
sustainability.
The overuse of these resources is the external costs of industrial production and high- income
consumption. (Social Cost from overuse/ to society from global warming- the difference between
MPC and MSC curves).
If the producers were made to pay for the overuse, they would not necessarily stop pollution or
stop using these resources. However, they would stop overusing them.
5.5 Lack of Public Goods
Private Goods:
● Are Rivalrous: its consumption by one person reduces its availability for someone else.
● Are Excludable: it is possible to exclude someone else from using the good, by charging
a price for the good. If someone is unable to pay, they will be excluded from using it.
Most goods are private.
Public Goods are Non- Rivalrous and Non- Excludable.
Ex: lighthouse, police force, national defense, etc.
Public Goods and the Free Rider Problem
The free-rider problem occurs when people can enjoy the use of a good without paying for it. It
rises from non- excludability: people cannot be stopped from using the good even though they
didn’t pay for it.
Public goods are a type of market failure because due to the Free Rider Problem, private firms
do not produce these goods. The market fails to allocate resources to its production.
Quasi- Public Goods
Goods that are non- rivalrous (Public) and Excludable.
Ex: Public museums and toll roads.
Since the price system works here, they can be made available by private firms. However, the
positive externalities for these are large, thus justifying government provision.
Correcting the market’s failure to provide Public Goods
Implications of direct government provision…
The market fails to allocate resources to the production of public goods. Public goods are
directly provided by the government and directly financed out of tax revenues, made available to
the public (almost) free of charge. This raises questions about (a) what goods should be
provided and (b) how much quantity they should be provided. Each good has an opportunity
cost, and economic factors must be used to decide.
Governments face a problem in calculating the expected benefits. With a private good, it is
possible to make estimates of expected benefits using the market price, but with public goods
this is not possible as they are not produced by private firms and have no price.
The govt. Tries to estimate the demand (or price) of public goods through votes/ surveys-
cost-benefit analysis. If the benefits are greater than the costs, good should be provided, and
vice versa. The good should be provided up to a point where MC= MB.
, However, cost-benefit analysis is a rough approximation as people who really want something
are likely to exaggerate its value.
Common access resources and environmental sustainibility
Common access resources are resources that are not owned by anyone, do not have a price,
and are available to anyone without payment.
Ex: clean air, lakes, rivers, biodiversity, hunting grounds, ozone layer, etc.
Common access resources are Rivalrous and Non- Excludable, which poses threats to the
environment. Rivalry makes goods less available for others and Non- Excludability (not possible
to exclude people from using it: no price) means that since they have no price, consumers and
producers use them abundantly and may overuse them.
Ex: overfishing, desertification, overgrazing, etc.
Sustainability is the ability of something to be maintained or preserved over time. It refers to
lack of destruction, and humankind’s ability to provide g&s to satisfy needs & wants in the future.
There should be a balance between environmental and economic goals of society; Economic
growth that does not deplete or degrade natural resources.
Sustainable development- a development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
Pollution of Affluence v/s Pollution of Poverty
Pollution of Affluence- the environmental degradation that rises from industrial production and
high- income production that involves heavy use of fossil fuels and open access resources.
Pollution of Poverty- economic activities pursued by very poor people in an effort to survive.
Pollution of Affluence and Sustainability
Negative Externalities- the problem of overuse of common access resources and its effect on
sustainability.
The overuse of these resources is the external costs of industrial production and high- income
consumption. (Social Cost from overuse/ to society from global warming- the difference between
MPC and MSC curves).
If the producers were made to pay for the overuse, they would not necessarily stop pollution or
stop using these resources. However, they would stop overusing them.
