What is a public good?

Public goods or pure public goods are goods that bring significant social benefits to society but cannot be provided by the free market. They are a market failure, which means the government needs to intervene in the market to ensure they are provided.  Because they bring significant social benefits we also consider them to be merit goods.

Public goods have two characteristics:

Non-rivalrous

Non-rivalrous means the consumption by one individual does not reduce the availability to others. For example, if a group of people are benefiting from a public good like street lighting and an extra person comes along to take advantage of the light the availability to the existing consumers is not reduced. This means the marginal cost (the cost of providing the good to an additional consumer) of providing a public good is zero once it is set up and being produced. The extra person who benefits from street-lighting adds nothing to the cost of providing the streetlight.

Non-excludable

Once a public good is being produced it is impossible to stop people from benefiting from it. Once streetlights are turned on it is impossible to stop people from benefiting from them, assuming they can get to an area covered by the lights.

Examples of pure public goods

The Thames flood barrier in London

There are not many examples of pure public goods, but economic theory would normally include flood barriers, sea defences, street lighting and national defence.

Economists often distinguish between pure public goods and quasi-public goods. Quasi-public goods have some elements of being non-rivalrous and non-excludable but not in the precise way that defines pure public goods. Examples include roads, bridges and public parks. Roads have some of the characteristics of public goods, but the space on a road can be looked at as being rivalrous when too many cars use them, and they can be excludable if tolls are in place.

Public goods as a market failure

Public goods are considered an example of market failure in pure free markets because they would not be produced.  This is because of the ‘free rider’ problem.  Once a public good is set up and being produced it is impossible to prevent people from benefiting from it (non-excludability) even if they have not paid for the good: some individuals free ride 'on the back' of the consumption paid for by others. 

Consider the example of a town that keeps being flooded by a river. The town needs a flood defence. A group of people who live alongside the river think of pooling their money to pay for flood defences, but they do not have enough money to pay for the barrier unless the whole town contributes.

Large numbers of people in the town choose not to contribute as they know that once the flood barrier is built they can benefit from it without paying – they can free ride on the consumption of those who do pay. This means the market price of the flood barrier will not be high enough for it to be provided. Public goods like flood barriers often have very high initial set-up costs so even wealthy philanthropic individuals would not be able to fund their provision.

Diagram 2.53 shows how the socially efficient output of the blood barrier at Q* where MSB equals MSC. The MSC curve in this case is horizontal at C because the marginal cost of an additional user of a flood barrier is zero. Once the flood barrier is set up the marginal cost of providing it to each additional consumer does not change as more consumers benefit from it. If the flood barrier costs $1Bn the cost will not change if two million people benefit from it or three million people benefit from it. Remember, this is hypothetical because in a free market the flood barrier would not be built. Because the output is zero in the market the whole yellow shaded area is the welfare loss.

Government intervention to manage public goods

The nature of pure public goods means that they will not be provided by the free market. Where a public good is something society should provide (street-lighting, defence and flood defences) the government can intervene through direct state provision. Quasi-public goods like parks, the police and street cleaning will be under-provided in a free market and governments intervene to produce quasi-public goods at the socially efficient level of output.

State provision

Where governments see the provision of a public good as crucial to society they will set up and provide the public good.  Most countries have public goods that are set up and provided by the state. Public goods such as national defence, flood defences and street lighting are directly provided by the government and funded through taxation.

Advantages of state provision:

• Government provision of public goods is the only way they can be produced. Remember the free market will not generate a price that can support the production of a public good.
• Governments are more likely to provide quasi-public goods near the socially efficient output.
• When the government is providing a public good it is more likely to make decisions in the public interest compared to private sector businesses that aim to make a profit. This could be important in the provision of quasi-public goods such as parks.
• Governments can provide public goods at zero price so they are available to low-income households.

Disadvantages of state provision:

• The cost of providing state-funded and managed public goods are extremely high and there is a significant opportunity cost to the government in terms of other areas of expenditure.
• Some people question the efficiency of state-run organisations that provide public goods.
• State-managed and organised public goods can be influenced by political decision making which may not be in the best interests of society. For example, expenditure on defence can be influenced by political rather than welfare factors.
• It is impossible to accurately know the level of provision of the public good that is socially efficient.

Private sector operation

Governments can set up and pay for the provision of public goods that can then be managed by private sector organisations. This is particularly the case with quasi-public goods like street cleaning. In this situation, the government pays private businesses that are contracted to clean the streets and dispose of waste.

 Advantages of private sector provision:

• This approach has the benefit of making sure the public good is provided, but the operational management may be more efficient than government-managed provision.
• Private sector provision means political decision-making is less likely to take place in the management of the public good.

The problems with this approach:

• The cost of setting up the provision of the public good still needs to be paid for by the government which will come with an opportunity cost.
• A private sector firm may provide the service putting profit ahead of welfare. Private sector-operated prisons are sometimes criticised for cost-cutting management practices. 
• It is impossible to know the level of provision of a private sector-managed public good to achieve the socially efficient output.