IB Economics SL & HLTopic 2.9 — Public GoodsPaper 1 & 2Core idea~10 min read
Public Goods and the Free Rider Problem
Everything so far has been about a market making too much or too little. Public goods are the extreme case: the market makes none. Not because the good is worthless, but because there is no way to charge anybody for it.
📚 What you need to know
A public good is non-excludable and non-rivalrous.
Non-excludable: you cannot stop anyone using it, so the price mechanism has nothing to work with.
Non-rivalrous: one person using it does not reduce what is left for anyone else.
A private good is the opposite — excludable and rivalrous — which is why firms can profit from it.
The free rider problem is people using the good without paying, because they can.
The result is under-provision, usually zero provision, by private firms.
Governments respond by doing nothing, providing it themselves, or contracting it out to a private firm and paying the bill.
Four kinds of good, two questions
Every good sits somewhere on this grid. Ask two questions — can people be excluded, and does one person’s use leave less for others — and you have your answer.
Learn this grid and you will never confuse a public good with a common pool resource again. The difference is the top word: rival or not.
Test a good against a lighthouse. Can you switch the beam off for one ship that has not paid? No. Does one ship using the light leave less light for the next? No. Non-excludable and non-rival — a textbook public good.
The free rider problem
Suppose a private firm decided to build street lighting anyway and charge households a monthly fee. What happens?
The first household works out that the lights are on whether they pay or not, so they stop paying. Their neighbours notice and do the same. Revenue collapses, the firm cannot cover its costs, and the lights come down. Everyone would have been better off with lighting, and nobody is willing to be the one who pays for it.
Nobody in this chain behaves badly. Each household makes the sensible decision, and the sensible decisions add up to no street lighting.
Why taxation is the answer. A public good cannot be sold, so it has to be paid for in a way you cannot dodge. That is precisely what a tax is — a payment that is not optional.
What a government can do
🧩 Three possible responses
Do nothing. The good is simply not provided. Sometimes the honest choice when budgets are tight.
Provide it directly. The state builds and runs it — roads, defence, flood barriers, public parks.
Contract it out. Private firms bid for the job, the cheapest sensible bid wins, and the government pays.
Options 2 and 3 both cost public money, so both carry an opportunity cost. Whichever you argue for, name what is being given up.
Strengths of government provision
Weaknesses
Essential goods get supplied at all, rather than not at all
Funded by general taxation, so there is an opportunity cost
Access does not depend on income, which improves equity
A zero price can mean excess demand and long waits
Society captures the external benefits as well as the private ones
Without competition there may be weak pressure to control costs
Provision can be aimed at the areas that need it most
Spending is cut in a recession, when it is often needed most
Worked examples
WORKED EXAMPLE
Worth building, but nobody builds it
Street lighting for a district costs $120,000. There are 4,000 households and each values the lighting at $50. Only 30% would pay voluntarily. Show why a firm will not supply it. [4]
Step 1: Total value to society4,000 × 50 = $200,000worth more than it costs, so society should have itStep 2: What a firm could actually collect0.30 × 4,000 = 1,200 paying households1,200 × 50 = $60,000Step 3: Compare with the cost60,000 < 120,000The firm makes a loss, so nothing is builtthe good is beneficial and still not provided: that is market failure
WORKED EXAMPLE
Paying for it through tax instead
Using the same figures, the council funds the lighting from a flat charge on all 4,000 households. Calculate the charge and the net gain per household. [3]
Step 1: Charge per household120,000 ÷ 4,000 = $30Step 2: Net gain per household50 − 30 = $20Every household is $20 better offStep 3: Comment
Nobody can free ride now, so the good gets built and everybody gains.
a flat charge is regressive though — $30 hurts a poor household far more
WORKED EXAMPLE
Classify each good
State which type of good each is, and why. [4]
a) National defence
Public good — nobody can be left unprotected, and protecting one more person costs nothing extra.
b) A cinema seat
Private good — you need a ticket, and only one person can sit there.
c) A river used by many farms
Common pool resource — nobody can be kept out, but the water runs out.
d) A subscription news website
Club good — a paywall excludes you, but everyone inside can read the same article.
always give the two properties as your reason, not just the label
💡 Exam tip
Define a public good with both properties every time. One alone will not earn the mark.
Explain the free rider problem as a chain: cannot exclude, so do not pay, so no revenue, so no supply.
Say under-provision, and often no provision at all. That phrasing captures the extreme case.
Keep merit goods separate. Firms do supply merit goods, just not enough of them.
Solid examples: street lighting, national defence, flood defences, lighthouses, public parks.
Evaluate by naming the opportunity cost of provision, and note that free provision can create excess demand.
⚠ Common mix-up
“Public good means the government provides it.” The definition is about excludability and rivalry, not about who supplies it.
Confusing public goods with common pool resources. Public goods are non-rival. Common pool resources get used up.
Saying free riders are cheating. They are behaving rationally. That is why the problem is so hard.
Calling healthcare a public good. A hospital bed is rival and you can be excluded from it, so it is a merit good.
Treating “free at the point of use” as costless. Taxpayers are paying.
Forgetting the third option. Contracting out sits between doing nothing and full state provision.
Up next: Adverse Selection, Moral Hazard and the Response — what goes wrong when one side of a deal knows something the other does not.
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