🏛️ What Are Public Goods?
Definition: A public good cannot be efficiently provided by the market.
Two defining characteristics
- Non-rivalrous.
- Non-excludable.
Classic examples: Street lighting, national defence, flood barriers, lighthouses, public fireworks displays.
Contrast with private goods
Private goods (e.g. a sandwich) are both rivalrous and excludable. If you eat it, nobody else can. And the shop can refuse to sell it to you. Public goods are the opposite on both dimensions.
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🚶 The Free-Rider Problem
Core concept: The free-rider problem is the fundamental reason markets fail to provide public goods.
Why the market fails
- Because non-payers can't be excluded, rational consumers have no incentive to pay voluntarily.
- If nobody pays, no firm can cover costs → the good is not produced at all by the market.
- This is a complete market failure — the good has clear social value but zero private supply.
Think about it: Imagine a private company tries to sell national defence. You could refuse to pay but still benefit from the protection. So could your neighbour. If everyone free-rides, the company earns nothing → no defence is provided.
Market failure vs under-provision
With externalities, the market under-provides (quantity is too low but not zero). With public goods, the market fails to provide at all — this is a more extreme form of market failure.
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📊 The Four Types of Goods
The IB often asks you to classify goods using the two characteristics. Here's the matrix:
Excludable + Rivalrous → Private goods
E.g. food, clothing, cars. Markets work well for these.
Non-excludable + Non-rivalrous → Public goods
E.g. national defence, street lights. Markets fail completely.
Non-excludable + Rivalrous → Common pool resources
E.g. fish stocks, forests. Over-exploited (topic 2.8).
Excludable + Non-rivalrous → Club goods (quasi-public)
E.g. Netflix, toll roads. Can be provided privately but may still have elements of market failure.
Memorise this 2×2 matrix. Examiners love asking you to classify goods and explain which market failure applies to each category.