Study Notes
Market failure occurs with public goods due to their non-excludability and non-rivalry, leading to under-provision in the market. Public goods — goods that are non-excludable and non-rivalrous. Example: National defense, flood defense systems. Non-rivalrous — consumption by one does not reduce availability for others. Example: Watching a fireworks display. Non-excludability — cannot prevent someone from using the good based on payment. Example: Street lighting. Free-rider problem — arises when individuals benefit from a good without paying, leading to market failure. Example: Mosquito abatement programs.
Exam Tips
Key Definitions to Remember
- Public goods
- Non-rivalrous
- Non-excludability
- Free-rider problem
Common Confusions
- Confusing public goods with private goods
- Misunderstanding the free-rider problem
Typical Exam Questions
- What is a public good? A good that is non-excludable and non-rivalrous.
- How does the free-rider problem lead to market failure? It causes under-provision as individuals benefit without paying, discouraging private provision.
- How can governments intervene in the market for public goods? Through direct provision or contracting out to the private sector.
What Examiners Usually Test
- Understanding of public vs private goods
- Explanation of the free-rider problem
- Analysis of government intervention methods