Public Goods
•Public goods are those goods and services which are
non rival in consumption and the users collectively
consume its benefits
• Also known as the collective consumption good

Characteristics of public good
Non Excludability :
• Once a public good is produced its benefits cannot be confined to
those who have paid for it
• It is not possible to exclude anyone from consuming the good or
services
• Examples: National defense, fireworks display, air traffic control,
police and fire protection

Non excludability

Characteristics of public goods
2) Non rivalry in consumption:
• One person’s enjoyment of good does not diminish another person's
consumption
• Marginal cost for supplying public good to an extra person is zero
• Examples: street lights, national defense, fresh air, police protection

Non rivalry

Characteristic of public goods
3) Non rejectable:
• If a public good is provided then in most of the cases we cannot avoid it
• Example nuclear defense system

Public goods and market failure
• Pure public goods are not normally provided by the private
sector because they would be unable to supply for a profit
• Public goods leads to market failure due to the missing
market

Free rider problem:
• Difficult to charge people from benefitting from the
goods and service
• People can benefit from a public good without paying for
the good
• Markets often have a difficult time producing public
goods because free riders attempt to use the public
good without paying for it
• Leads to under provision of a good

Free Rider Problem

Understanding free rider problem with prisoners
dilemma game
• If both contributes total benefit $20.
each gain $10 with net gain of +$4
($10-$6)
• If one contribute and another does
not then one who then total benefit
will $10 , each gains $5 but the one
who contributes will realize net gain
of -$1 and then the one who does not
pay will have net gain 0f +$5
• If neither of them contributes there
will 0 cost and 0 benefit

Drop in the bucket problem:
• The good or service is generally very costly that its provision
does not depend on whether any single individual pays
• Example police force

Should the government provide public goods?
• The non rival nature provides a strong case for the government to
provide the public goods
• Government can charge people in the form of tax
• State provision prevent under provision and under consumption of
the public goods
• Government can provide the public goods efficiently due to
economics of scale

Mixed goods
• Goods that part private and part public
• Example education