Public Goods: The Free Rider Problem (Edexcel IGCSE Economics)

Characteristics of Public Goods

• Private goods are goods that firms are able to provide to generate profits

  • They can generate profits as these goods are excludable and rivalrous

    • The firm is able to exclude certain customers from purchasing their goods through the use of the price mechanism, as some customers cannot afford to buy them

    • Customers also compete for these goods, which are limited in supply and this rivalry helps to generate profits for firms

• Public goods are goods that are beneficial to society (e.g. roads, parks, lighthouses, national defence) but which private firms do not provide as they are unlikely to be capable of generating a profit

  • This is due to the principles of non-excludability and non-rivalry 

    • Non-excludability refers to the inability of private firms to exclude certain customers from using their products. In effect, the price mechanism cannot be used to exclude customers, e.g. street lighting

    • Non-rivalry refers to the inability of the product to be used up, so there is no competitive rivalry in consumption to drive up prices and generate profits for firms

    • Therefore, governments will often provide these beneficial goods themselves, and so they are called public goods

• If firms decide to provide these goods anyway, it would give rise to what is called the ‘free rider’ problem

  • This is a situation where customers realise that they can access the goods, even without paying for them

  • If they are paying, they can stop and continue to enjoy the benefits, ‘free-riding’ on the backs of paying customers

  • Over time, any customers who are paying for the goods stop doing so

  • At some point, firms cease to provide these goods and they become under-provided in society