Week 6 Market Law and Regulation

Non-rivalry

one person’s consumption of the good does not diminish another person’s ability to consume it.

Good	Rival or non-rival?	Why?
Sandwich	Rival	If I consume it, you cannot
Bus seat	Rival if full	Only one person can sit there
Climate stability	Non-rival	Everyone can benefit at once
Knowledge	Usually non-rival	My use of an idea does not stop your use

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Non-excludability

it is difficult or costly to prevent non-payers from benefiting

Good	Excludable or non-excludable?	Why?

Gym

Excludable

Need membership

Cinema

Excludable

Need ticket

Clean air

Non-excludable

Cannot easily stop people breathing it

National defence

Non-excludable

Everyone in the country benefits

Why do public goods create market failure?

free-rider problem.

Free rider means:

People think:

“Why should I pay if I can benefit anyway?”

So everyone waits for others to contribute. The result is that the good is underprovided.

Example:

• Everyone benefits from climate protection.

• But each firm or country may prefer that others pay the cost.

• So the market produces too little climate protection.

This is why public goods often justify regulation, taxes, subsidies, public funding, or public procurement.

A public good should be produced when the SUM of all individuals’ willingness to pay exceeds the cost of production (unlike a private good, where one person’s willingness to pay alone must exceed the cost). Because no one can be excluded, individuals understate their true valuation hoping others will pay — so voluntary markets are expected to underprovide, even though the good would pass a cost-benefit test if true preferences were revealed.

Prisoner’s Dilemma logic

The guide says the free-rider problem can be understood as a Prisoner’s Dilemma.

That means:

• everyone would be better off if everyone contributed,

• but each individual has an incentive not to contribute,

• so the final outcome is worse for everyone.