Public Goods And Market Failure
Public Goods and Market Failure
Public goods are goods that would not be provided at all in a free market. Since they are goods that are of benefit to society, the lack of public goods in a free market is considered to be a market failure. Examples of public goods would be national defense and flood barriers. There is much debate over what actually a public good is and what is not. Beside that the inability of the market to provide public goods is a failure because nobody would pay for the goods though they are essential to society (Cowen, 2002). The problem arises because the nature of public good. It is non-excludable (you can 't really exclude the other person from using the good, it 's like street lamp) and excludable (the benefit for the subsequent user will not be reduced) (Cowen, 2002). People will tend to wait for others to pay for the good and then use it for free, it is the 'free rider ' problem. Therefore, government will need to intervene by providing public goods out of general taxation.
The reason that public goods will not be provided at all in a free market is that they have two characteristics-they are non-excludable and excludable and that makes it pointless for private individuals to provide the goods themselves (Cowen, 2002). If a good does not have both of these characteristics, then it is not a public good. If a good is completely non-excludable and excludable, such as national defense and flood barriers, then it is called a pure public good. A good is said to be non-excludable if it is impossible to stop other people consuming it once it has been provided. If a private individual erects a flood barrier to protect a house, the other people in the area will gain the benefit, even though they have paid nothing. This is known as the free-rider problem. Logically, no one will pay for a flood barrier, in the hope that someone else will do it. The good will not be provided by the free market. A good is said
Public goods are goods that would not be provided at all in a free market. Since they are goods that are of benefit to society, the lack of public goods in a free market is considered to be a market failure. Examples of public goods would be national defense and flood barriers. There is much debate over what actually a public good is and what is not. Beside that the inability of the market to provide public goods is a failure because nobody would pay for the goods though they are essential to society (Cowen, 2002). The problem arises because the nature of public good. It is non-excludable (you can 't really exclude the other person from using the good, it 's like street lamp) and excludable (the benefit for the subsequent user will not be reduced) (Cowen, 2002). People will tend to wait for others to pay for the good and then use it for free, it is the 'free rider ' problem. Therefore, government will need to intervene by providing public goods out of general taxation.
The reason that public goods will not be provided at all in a free market is that they have two characteristics-they are non-excludable and excludable and that makes it pointless for private individuals to provide the goods themselves (Cowen, 2002). If a good does not have both of these characteristics, then it is not a public good. If a good is completely non-excludable and excludable, such as national defense and flood barriers, then it is called a pure public good. A good is said to be non-excludable if it is impossible to stop other people consuming it once it has been provided. If a private individual erects a flood barrier to protect a house, the other people in the area will gain the benefit, even though they have paid nothing. This is known as the free-rider problem. Logically, no one will pay for a flood barrier, in the hope that someone else will do it. The good will not be provided by the free market. A good is said
References: Cowen, T. (2002). The Concise Encyclopedia of Economics Public Goods and Externalities. Retrieved from Library of Economics and Liberty website: http://www.econlib.org/library/Enc1/PublicGoodsandExternalities.html