2.9 Market failure - public goods

A pure public good is non-rival and non-excludable.

These properties create free riding; many real goods are mixed.

Test rivalry and exclusion separately before classifying.

National defence protects residents together; a crowded park is rival at capacity.

Publicly provided does not automatically mean public good.

Non-rivalry means one person's use does not reduce the amount available to others; non-excludability means non-payers cannot feasibly be prevented from benefiting. Because each person can wait for others to pay, stated willingness to pay is understated and a profit-seeking market cannot reliably collect enough revenue, causing non-provision or under-provision relative to the efficient quantity.

Government intervention addresses free riding by using compulsory revenue such as taxation to finance provision. It may directly provide the public good through public agencies or contract production to a private firm.

Direct provision combines public funding and public production. Contracting out keeps collective funding and service requirements public but uses a private supplier selected and monitored under a contract.

Compare cost, expertise, service quality, coverage, accountability and monitoring. The government must specify outputs and enforce the contract because users cannot rely on ordinary individual purchasing to reveal demand.

A municipality can operate street lighting itself or pay a private company to install and maintain it, while residents receive the shared service without individual usage charges.

Public funding does not require public production, and private production does not turn a non-rival, non-excludable service into a private good. Neither delivery method is automatically efficient or equitable.