What are public goods?

Public goods are goods that would not be provided at all in a free market, but which are necessary and
beneficial to society. Because the free market is unable to provide these goods without intervention, public
goods are an example of market failure.

There is a lot of debate about what is and is not classified as a public good. Public goods are called 'public'
not because they are provided by the government, but because they have certain intrinsic characteristics
which mean that the government must intervene to ensure they are available to all. To understand what a
public good is, it is useful to consider what private goods are. A private good has two characteristics:

• It is rivalrous. This means its consumption by one person reduces its availability to someone else.
For example, beverages, pencils and clothes are rivalry, because when you buy one, another
person cannot buy the same one. Most goods are rivalrous.

• It is excludable. This means it is possible to exclude others from using the good once it has been
provided, because you must pay for the good to use or consume it. Again, most goods are
excludable.

Figure 1. Traffic lights.

A good is said to be non-excludable if it is impossible to stop other people from consuming it once it has
been provided, even though you have paid for it. A flood barrier is a good example to understand this
concept. If someone privately constructs a flood barrier to protect his house, other people might also be
protected by it and will gain the benefit without having paid anything.

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]
A good is said to be non-rivalrous if one person consuming it does not prevent someone else from
consuming it as well. As we said previously, most goods are rivalrous because once one person has
consumed the good, it cannot be consumed by someone else. For example, once you have eaten an ice
cream, no one else can eat that same one. A park bench is a good example of a non-rivalrous good, if you
sit on the park bench, that doesn’t prevent others from enjoying that park bench after you.

Table 1. Characteristics of the four types of goods.

Excludable Non-excludable

Rivalrous Private goods Common pool resources

For example, an apple For example, fish in the ocean

Non-rivalrous Club goods Public goods

For example, a park bench For example, streetlights

Public goods are both non-excludable and non-rivalrous, because if one person consumes the goods,
such as streetlights, it does not prevent another person from using it as well – even at the same time. You
cannot keep the benefit of consuming the good all to yourself once it has been provided. This means there
is little incentive for a private individual to pay for the good if other people can then consume it as well, free
of charge.

Be aware

A good must be both non-rivalrous and non-excludable for it to be a public good. If it has only one of
these characteristics then it is not a public good. It is difficult to find products that exhibit these two
characteristics perfectly. Even a traditional public good, such as a lighthouse, has the potential to be
excludable, for example, if the cost of providing the lighthouse is built into the docking fees at the nearest
port. Goods that partially exhibit the two characteristics are referred to as quasi-public goods: for example,
a park or a highway.

Examples of public goods include:

• Streetlights

• National security

• Lighthouses

• Air

• Policing and law enforcement

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]
Exam tip

Students often lose many marks for essays about public goods because their chosen example does not
clearly illustrate the concept. Good essays usually start with a definition of a key term, followed by the
introduction of a real-world example. This real-world example should be employed throughout the essay,
not just casually mentioned once or twice.

The free-rider problem

The free-rider problem exists because no one is willing to pay for a good or service when they think that
somebody else will pay for it. This is why the goods will not be provided by the free market. Even if the
government provides the goods or service by using tax revenues to pay for it, there will still be some free
riders. All those who do not pay their taxes are not contributing to funding the public goods and could be
considered free riders.

Quasi-public goods

There are some goods that fulfil some, but not all, the characteristics of a public good. These are
called quasi-public goods. There are two types of quasi-public goods: common pool resources, which we
have already discussed in the previous subtopics, and club goods.

Figure 2. Museums are quasi-public goods.

Common pool resources are rivalrous but non-excludable, whilst club goods are non-rivalrous but
excludable. We looked at common pool resources in detail in subtopic 2.8. These are resources that cannot
exclude individuals, but where one person’s use of a good may deprive another person’s future use of it.
The most widely quoted example of this is fish in the ocean. Once consumed, they are no longer left for
others, so they are rivalrous, but it is difficult to exclude people from fishing in the ocean.

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]
Examples of club goods include museums, gated parks and park benches, cinemas and streaming services.
People can be excluded from the use of the good, but one person’s use of the good doesn’t prevent
another person’s future use of it. These are not good examples of market failure, because the free market
would provide these goods. Parks can be closed, for example, and tickets sold for entry.

Be aware

People don’t have to be excluded from the good or service for it to be a club good. The important thing to
remember is whether people can be excluded from the good or service. A park can be accessible by
anyone, but it potentially could be shut. Parks clearly are not private goods, so must be distinguished from
them as club goods.

Government intervention in response to public goods

Governments tend to intervene in markets to reduce or eliminate market failure. The government will
either directly provide the goods and services themselves, or it will cover the costs for private firms to
provide them. The government charges consumers through taxation.

Government provision of public goods

In many cases, the government will provide public goods themselves. For example, the armed forces are
rarely privatized. Because the government uses taxes to pay for the good, the issue of the free-rider
problem is mostly resolved because everyone in society contributes to tax revenues in some way.

Figure 1. The armed forces is a good example of a public good.

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]
Public goods are usually also merit goods. The provision of streetlights will reduce crime taking place at
night and make people feel safer. Reduced rates of crime will cost the police less and benefit several other
sectors of the economy too (such as health care). These are all positive externalities when street lighting is
consumed, and so there is a welfare gain to all of society. The social benefits of streetlights are greater than
the private gains of using them.

Be aware

All public goods are merit goods, but not all merit goods are public goods. The scale at which the
government can provide the goods also allows economies of scale to be enjoyed. This means that at large
levels of output, average costs will fall. Governments can take on extremely large-scale projects without
necessarily worrying about profitability. If necessary, the government can also raise funding through the
sale of bonds, which enables it to borrow money from financial investors.

Case study

The case for reinvesting in streetlights

Figure 1. Streetlights have a big impact in making cities and public places safe and comfortable for all.

Streetlights are the most cited example of public goods. Streets have been lit in various ways since Roman
times, but from the 15th century onwards, various European cities have legislated those private homes lit
candles outside or on street corners. At the time, you could also hire a lantern-bearer if you were wealthy
enough.

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]
The first publicly provided streetlights were installed on Westminster Bridge in London by the London and
Westminster Gas Light and Coke Company in 1813. In Brazil, local municipalities are responsible for
installing and maintaining the streetlight network. Street lighting is their second biggest expense, after
paying staff who work for the municipalities. In 2017, streetlights in Brazil were still using technology that
was 40–60 per cent less efficient than LEDs. Energy costs globally have risen steadily in recent decades, so
Brazil’s street lighting has become progressively more expensive to maintain. Although LEDs are more
energy efficient, they are also significantly more expensive than traditional lights. However, LED prices are
falling as they become more widely used.

Questions to consider:

• Should Brazilian municipalities switch over to LED lighting?

• What are all the considerations they must think about when making this decision?

Figure 2. The London Underground started as a private enterprise, became a public–private partnership in
2000, and in 2010 was taken over by Transport for London as part of the Greater London Authority.

Despite the advantages of government provision of public goods, the government is not necessarily the
most efficient provider of goods or services. With any large-scale investment by the government, there
will always be an opportunity cost associated with the decision to provide public goods. The government
will also face political pressure about their decision, as not all members of the government will agree with
the investment. There will also be pressure groups in society to contend with.

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]
Table 1. A summary table of the advantages and disadvantages to government provision of public
goods.

Advantages of government provision Disadvantages of government provision

Improves social welfare as consumption is Has to be financed, which generates an

increased. opportunity cost.

Eliminates the free-rider problem. Government provision may not be economically

efficient, as the government is unable to determine
the optimal output.

Can be more efficiently provided because the Some quasi-public goods, like toll highways, could
government, as the sole provider, can achieve be provided more efficiently by private firms.
economies of scale.

Exam tip

Students often tend to adopt the following structure to their 15-mark essays. Define key term; explain
concept; one paragraph listing advantages; one paragraph listing disadvantages; conclusion.

Paragraphs that list advantages and disadvantages do not read well, nor do they show that you
have understood (although it does show good memorizing skills). Instead, try to write each paragraph
around a theme, in which you present an argument and a direct counterargument.

For example, in one paragraph you might explain that the government’s size allows it to achieve some
economies of scale when building public goods. This argument’s counterargument is that large firms with
monopoly power will also be able to achieve economies of scale, as well as being able to take advantage of
other efficiencies they enjoy as private enterprises. If you explain the above point clearly and offer a direct
counterargument within the same paragraph, you will show the effective evaluation skills required for top-
scoring answers.

Contracting out to the private sector

The government can pay the private sector to provide the goods, rather than providing it directly
themselves. The private sector can be more efficient than the government. The profit motive

gives firms the drive to raise capital at the same time as being efficient. Even if the firms are

monopolies that do not face any competition, they can still use their profits to achieve greater efficiency.
Higher level students will look in more detail at these ideas about competition in subtopic 2.11.

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]
However, the extent to which the private sector is more efficient is debated. According to research
conducted by the European Public Service Union , there does not seem to be clear evidence that the private
sector is more efficient than the public sector. This is because borrowing costs are higher for private firms,
and they must also deliver profits for their shareholders. Both these costs must be met by sales to
consumers. The government does not need to worry about borrowing costs or profits as much.

Tel: +962 79 9577771 [Link] 1412 Amman 11118 Jordan

[Link] administration@[Link]