IB DP Economics - Unit 2 - Public goods-Study Notes - New Syllabus

Public Goods

Public goods are goods that are non-rivalrous and non-excludable, meaning they can be consumed by many people without reducing availability and no one can be prevented from using them.

Non-rival + Non-excludable → Public good

Key Characteristics  

Non-rivalrous:

• Consumption by one person does not reduce the amount available for others.
• Example: Street lighting, national defence.

Non-excludable:

• It is not possible to exclude people from using the good.
• Once provided, everyone can benefit.

The Free Rider Problem

The free rider problem occurs when individuals benefit from a good without paying for it.

• Since people cannot be excluded, they have no incentive to pay.
• They rely on others to fund the good.
• This leads to underprovision or no provision in a free market.

No incentive to pay → Market failure

Economic Explanation

• Firms cannot charge consumers effectively.
• Revenue cannot be generated despite demand.
• As a result, private firms will not supply public goods.

Thus:

• Market equilibrium leads to:
  

  \( \mathrm{Q = 0} \) or underprovision

• Socially optimal level requires:
  

  \( \mathrm{MSB = MSC} \)

Government Intervention

• Direct provision funded through taxation.
• Ensures the good is provided at or near the socially optimal level.

Government provides → Corrects market failure

Evaluation:

• Provision improves efficiency and social welfare.
• However, may lead to government failure (inefficiency, overprovision).

Key Point:

• Public goods are non-rivalrous and non-excludable.
• Free rider problem leads to underprovision.
• Private markets fail to supply these goods.
• Government intervention is necessary.