Starter: Recap
 Define a merit good
 Define a demerit good
 What is the link between these and market failures?
 Give 5 examples of each.
 Explain ways in which the government tries to increase
consumption of merit goods and decrease
consumption of demerit goods.
Aims and Objectives
Aim:
 Understand public goods and how they cause market failure.
Objectives:
 Define public goods and quasi public goods.
 Describe the features of public goods and quasi public goods.
 Analyse how public goods cause market failure.
 Evaluate the need and benefit of public goods in the UK.
Public Goods
 May cause market failure.
 Not because too much or too little is produced in the free
market.
 Because it may not be produced at all!
 Can you think of any goods which if left to the free market
would not be produced at all?
Public Goods
Must possess the
following to be a public
good.
1) Non Excludability
 When a public good is being consumed, the benefits of its
consumption cannot be confined to only those people who
have paid for it.
 Those who do not pay can enjoy the benefits of consumption
at no financial cost.
 This is known as the free-rider problem.
Non Excludability Example:
Lighthouses and Ships
 Entrepreneur builds a lighthouse.
 Tries to charge each ship that passes.
 However some do not and benefit from the light by not
crashing. There is no incentive to pay!
 The market fails to provide a service for which there is an
obvious need.
2) Non-Rivalry
 Consumption of a public good by one person does not reduce
the availability of a good to other people.
 Therefore we all consume the same amount of public goods
even though our valuation of the benefit may differ.
Airwaves – A Quasi Public Good
 Case Study
Spot the Public Goods
Public Goods Examples
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Street lighting
Police services
Fire Services
National defence
Flood control systems
Roads
Radio programmes
Public Goods and Market Failure
 Market failure exists with public goods, as if left to
the free market, these goods would not be supplied
at all and quasi public goods would be under supplied.
 = complete market failure
 Who decides the level of output of public goods?
Public Goods and Market Failure
 Government decides what output for
society.
 Estimate the social benefit from
consumption.
 Attributing a monetary value is
difficult.
 Spending may increase before an
election.
Public Goods and Market Failure
 What happens when the free market attempts to provide
public goods?
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New York Five Points
Private fire brigades
Competing to put fires out.
Wasn’t more efficient.
They just set fire to other
properties in able to
compete and appear to be
doing the better job!
 DVD Clip
Free Rider Problem
 Root of problem is free-rider problem.
 Consumers behaving rationally will attempt to ‘free
ride’ from other consumers who purchase a good or
service.
 Once one consumer has purchased a good, others
cannot be prevented from benefitting from it.
 I pay my council tax
 My neighbour does not.
 Both houses are burgled in the same night.
 Should both houses receive police attention?
• The public should pay for
this public good!
• Want the license fee to
remain.
• Want it to be made
easier to catch evaders.
• 17 million people value
the service against 6
million.
• Positive externalities.
The General Public
The BBC
BBC as a Public Good Debate
• The public shouldn’t pay
for this public good!
• Only over 60s value it.
• Programming not
appropriate for younger
people.
• Criticisms list.
• Maybe it should be
subscription, instead of
taxation?
• Why should people be
allowed to evade it?