Market Failure - Public Goods

Question 1

What are Public Goods?

Answer 1

Goods that are beneficial to society but which will not be provided by private firms due to the principles of non-excludability and non-rivalry.

Question 2

What is the Free-Rider problem and how does it cause Complete Market failure?

Answer 2

• If firms decided to provide public goods, it would give rise to what is called the ‘free rider’ problem.
• This is a situation where customers realize that they can still access the goods, even without paying for them.
• If they are paying, they stop and continue to enjoy the benefits. They are ‘free-riding’ on the backs of other paying customers.
• Over time, any customers who are paying for the goods will stop. (Everyone will stop paying).
• At some point, firms will cease to provide these goods and they wont be provided in society.

Question 3

Meaning of Non-excludability?

Why can

Answer 3

Refers to the inability of private firms to CHARGE A PRICE for a good that excludes unpaying customers from using their products.
e.g. street lighting.

~~> Why can’t prices be charged:
> The benefits of consuming the good cannot be confined to the individual that has paid.

> There is no cost-efficient way to price. (no framework).

Question 4

Meaning of Non-rivalry?

Answer 4

Non-rivalry refers to the inability of the product to be used up, so there is no competitive rivalry in consumption to drive up prices and generate profits for firms.

Question 5

What are Quasi Public Goods?

Answer 5

Goods that can be either non-excludable/ rivalrous, at the same time, or goods which are on or the other, during a period.