3. Under-Provision of Public Goods

What are public goods?

Goods that are non-excludable and non-rivalrous in consumption.

What is the free rider problem?

The idea that once a public good is provided, it is impossible to stop all people from receiving the benefit of it, therefore there is very little reason for people to pay for the consumption of these goods.

Why do the government provide some goods?

Firms will not pay for these goods due to the free rider problem, forcing the government to provide them instead.

What are private goods?

Good that are excludable and rivalrous in consumption.

Define non-excludability.

The inability to prevent non-paying consumers from accessing a good.

Define non-rivalrous.

The idea that each party's use of the good or service does not diminish others' use - it is available to all.

How can public goods cause market failure?

They cause a missing market, as they will not be provided by the private sector, since they cannot be supplied for a profit due to the free rider problem. Therefore the government has to provide public goods through taxation.