Cambridge International as and a level Economics Ebook

The problem caused by public goods
Th
e problem that may be caused in a free market by the 
existence of public goods is a serious one: the market may 
not produce them. Th
ere may be a consumer demand for 
such products (consumers are willing and able, in principle, 
to pay for the product’s services), but the free market may 
not have a mechanism for guaranteeing their production.
Th
is problem is referred to as the 
free rider
issue. 
Some consumers attempt to gain a ‘free ride’ on the 
back of other consumers’ purchasing the public good. 
It is entirely reasonable that they may attempt to do 
this. One of the key characteristics of public goods is 
that they are non-excludable. Th
is implies that once one 
consumer has purchased the product, all other consumers 
cannot be prevented from benefi ting from that product. 
Take again the example of the lighthouse. Once one 
particular fi sherman has provided a lighthouse close 
to some dangerous rocks for his own benefi t, then all 
other fi shermen in the area will benefi t equally from the 
lighthouse. Th
eir advantage, however, is that they do not 
have to pay for this lighthouse: they have received a free 
ride on the back of someone else’s purchase. Th
e logical 
thing to do, then, would seem to be for all fi shermen to sit 
back and to wait for one fi sherman to be foolish enough 
to provide a lighthouse so that those not purchasing can 
benefi t without paying. Unfortunately, the implication of 
this is that the lighthouse will never be provided: everyone 
waits for everyone else to provide it, and nothing happens.
It could be argued that a more likely scenario to the one 
described above is that all fi shermen in an area might agree 
to club together in order to make the purchase and thus 
the lighthouse would be provided. However, there is still 
a problem here as it is in the interest of any one fi sherman 
to conceal his desire for the lighthouse, refuse to pay but 
still to gain the fi nal benefi t once it is provided. Again, if all 
fi shermen behave like this, the lighthouse is not provided.
Th
e existence of public goods may mean that scarce 
resources are not used in a way that would be desirable. 
People may wish for the provision of such goods, but the 
demand may never be registered in the market. Private 
goods, however, can also be rejected if the price is too high 
or the quality is not what is expected. Th
ese seemingly 
obvious qualities of private goods are useful since they 
help us understand what is meant by public goods.