nature and definition of public goods

Syllabus Mapping – What This Note Covers

1. Foundations – Quick Recap of Core AS‑Level Concepts

• Scarcity & Choice: Resources are limited; societies must decide what to produce, how, and for whom.
• Economic Methodology: Positive vs. normative statements; ceteris paribus; use of models and diagrams.
• Factors of Production: Land, labour, capital, entrepreneurship – all relevant when the state produces a public good.
• Economic Systems: Market, command, mixed – public‑good provision is a classic reason for mixed economies.
• Production Possibility Curve (PPC): Shows trade‑offs; moving resources from private to public‑good output shifts the PPC inward for private goods but can raise social welfare.

2. Definition of a Public Good

A public good is a good or service that is non‑excludable and non‑rivalrous in consumption.

2.1 Non‑excludable

It is impossible or impractically costly to prevent anyone from enjoying the benefit once the good is provided.

2.2 Non‑rivalrous

One person’s use does not diminish the amount available for others.

2.3 Positive Externalities

Because the benefit spills over to non‑payers, the good generates a positive externality – a third‑party gain not reflected in market prices.

3. Key Characteristics & Economic Implications

• Non‑excludability → free‑rider problem.
• Non‑rivalry → marginal cost of an additional user is essentially zero.
• Positive externalities → social marginal benefit (SMB) > private marginal benefit (PMB).
• Equity relevance: Tax‑financed provision spreads the cost across the whole population, addressing fairness concerns.

4. Diagrammatic Analysis – Welfare Loss from the Free‑Rider Problem

For a pure public good the market demand curve represents the aggregate willingness to pay (the SMB). The marginal cost (MC) curve is upward‑sloping. The socially optimal quantity (Q*) occurs where SMB = MC.

• Because the good is non‑excludable, a private firm cannot charge a price that excludes non‑payers; the effective market demand collapses to zero.
• Result: Q_m = 0, creating a triangular dead‑weight loss (DWL) between the SMB and MC curves.
• Consumer and producer surplus are both zero in the market outcome, whereas the socially optimal outcome would generate a large net social surplus.

5. The Free‑Rider Problem – Step‑by‑Step

1. Good is non‑excludable → individuals can benefit without paying.
2. Potential buyers anticipate they can obtain the good for free, so their willingness to pay at any positive price falls to zero.
3. Private firms face zero demand → no profit motive to produce.
4. Market provision is therefore under‑investment (often Q_m=0) compared with the socially optimal Q*.

6. Comparison with Private Goods

7. Spectrum of Goods – From Pure Public to Club Goods

• Pure public good: Non‑excludable & non‑rivalrous (e.g., national defence).
• Club (or toll) good: Non‑rivalrous but excludable (e.g., subscription‑based streaming, toll bridge). Shows the continuum between pure public and private goods.
• Common‑pool resource (CPR): Rivalrous but non‑excludable (e.g., fisheries, groundwater). Highlights the “tragedy of the commons”.
• Quasi‑public good: Mostly non‑rivalrous but becomes rivalrous when usage is high (e.g., large public parks, broadband infrastructure).

8. Illustrative Real‑World Examples

1. National defence: Protection is available to every citizen regardless of individual contribution.
2. Street lighting: One person’s use does not diminish the light for others, and exclusion is impractical.
3. Clean air / air‑quality standards: Improves health for the whole population; one person’s breathing does not reduce the amount of clean air.
4. Large urban parks: Typically non‑rivalrous for ordinary levels of use; crowding only occurs in unusually high‑density situations.
5. Public broadcasting (e.g., BBC World Service): Non‑excludable (anyone can receive the signal) and non‑rivalrous (one viewer does not limit another).

9. Government Intervention – Tools Aligned with the Cambridge Syllabus

To correct the market failure, governments may use one or more of the following (Cambridge terminology in brackets):

• Direct provision (state production) – e.g., national defence, public schools.
• Financing through taxation – collective funding ensures everyone contributes to the cost.
• Subsidies – payments to private firms to encourage provision (e.g., subsidies for renewable‑energy projects that generate clean air).
• Regulation / standards – legal requirements that guarantee a minimum level of provision (e.g., emissions standards).
• Indirect taxes – e.g., carbon taxes that internalise the externality and raise revenue for public‑good provision.
• Public‑private partnerships (PPPs) – contracts where private firms deliver the service under public oversight.
• Information & “nudge” policies – campaigns that raise awareness of the benefits of the public good (e.g., recycling drives).

10. Links to Macroeconomics – How Public‑Good Provision Affects the Wider Economy

11. A‑Level Extensions – Deeper Economic Analysis

• Utility & Indifference Curves: Public‑good demand can be derived from the marginal rate of substitution between a private good and the public good, reflecting willingness to pay for additional units of the public good.
• Detailed Market‑Failure Framework:
  • Identify the externality (positive), the non‑excludability, and the resulting free‑rider problem.
  • Show the divergence between private marginal benefit (PMB) and social marginal benefit (SMB).
  • Explain why the market equilibrium (Q_m=0) is Pareto‑inefficient.
• Government Failure: Even after intervention, problems such as bureaucratic inefficiency, rent‑seeking, or misallocation of resources can arise. Discuss the trade‑off between equity and efficiency.
• Labour‑Market Externalities: Public education (a quasi‑public good) raises the skill level of the workforce, generating positive spill‑overs for employers.
• Development‑Economics Perspective: Many low‑income countries under‑provide global public goods (e.g., disease surveillance). International aid and multilateral institutions can help overcome the free‑rider problem on a worldwide scale.
• Cost‑Benefit Analysis (CBA): Use of discounting, shadow pricing, and willingness‑to‑pay surveys to evaluate large‑scale public‑good projects such as flood‑defence schemes.

12. Summary Checklist – Quick Revision Tool

• Identify a good as public when it is both non‑excludable and non‑rivalrous.
• Explain why positive externalities arise and how they shift the social marginal benefit curve above the private one.
• Describe the free‑rider problem and its effect on market provision (Q_m=0).
• Sketch the welfare‑loss diagram showing SMB, MC, Q* and the dead‑weight loss.
• List the main government interventions and match each to Cambridge terminology (direct provision, taxation, subsidies, regulation, indirect taxes, PPPs, information).
• Distinguish pure public goods from club goods, common‑pool resources, and quasi‑public goods.
• Recall at least three real‑world examples (e.g., national defence, street lighting, clean air).
• Explain at least two macro‑economic links (impact on AD, fiscal financing).
• State one possible government failure that could arise after intervention.
• For A‑Level: relate public‑good demand to utility maximisation and discuss global public‑good issues.