Public goods and the free-rider problem

Private and public goods

A private good is:

• rivalrous: one person's consumption reduces the amount available for others (if I eat an apple, you cannot)
• excludable: people who do not pay can be prevented from consuming it.

A public good is:

• non-rivalrous: one person's consumption does not reduce the amount available to others (a lighthouse beam, street lighting, national defence)
• non-excludable: once provided, it is impossible or too costly to stop non-payers from benefiting.

Many goods are in between: a toll road is excludable but non-rival until it becomes congested; a fishing area is rival but hard to exclude people from. These are sometimes called quasi-public goods.

The free-rider problem

Because a public good is non-excludable, people can benefit without paying: they free ride on others who pay. Knowing this, each person has an incentive not to reveal how much they value the good. Firms therefore cannot charge enough to make a profit, so the private sector provides too little or none of the good: a missing market (complete market failure), even though society would value it more than it costs.

This is why public goods are usually provided by the state and financed by taxation, which everyone must pay.

Evaluation points

• Technology can make goods excludable: encrypted television signals, electronic road pricing.
• Some 'public goods' are provided privately with other revenue (free-to-air broadcasting funded by advertising).
• State provision has problems: the government must guess how much people value the good (an information gap), and it may over- or under-provide (government failure).

Worked example

Explain why street lighting is unlikely to be provided by a free market.

1. Street lighting is non-rival: one person using the light does not reduce the light for others.
2. It is non-excludable: non-payers cannot be stopped from benefiting.
3. So people free ride, and a private firm cannot collect enough revenue to make a profit.
4. The market under-provides or does not provide it: a missing market.

Answer: Non-excludability creates a free-rider problem, so private firms cannot profit and the market fails to provide it.

Check yourself

1. A good is non-excludable when
   • one person's use reduces the amount available to others
   • it has no substitutes
   • people who do not pay cannot be prevented from consuming it
   • it is provided by the government
   Show answer

   people who do not pay cannot be prevented from consuming it. Non-excludability is what allows free riding.

2. Which property means that one more person enjoying a fireworks display does not reduce others' enjoyment?
   • Non-rivalry
   • Non-excludability
   • Excludability
   • Price inelasticity
   Show answer

   Non-rivalry. Extra consumers do not reduce the amount available to others.

3. Which is the best example of a public good?
   • A cinema ticket
   • A bus journey
   • A flood defence barrier protecting a town
   • A private swimming pool
   Show answer

   A flood defence barrier protecting a town. Everyone behind the barrier is protected, whether they pay or not, and protecting one more home does not reduce protection for others.

4. The free-rider problem means that
   • goods are always provided free by the government
   • people can benefit from a good without paying, so firms cannot make a profit supplying it
   • consumers always reveal their true willingness to pay
   • rival goods become excludable
   Show answer

   people can benefit from a good without paying, so firms cannot make a profit supplying it. Non-payers cannot be excluded, so revenue is too low for private provision.

5. A chocolate bar is a private good because it is
   • non-rivalrous and non-excludable
   • non-rivalrous but excludable
   • rivalrous but non-excludable
   • rivalrous and excludable
   Show answer

   rivalrous and excludable. If you eat it, no one else can; and the shop can refuse to sell to non-payers.

6. Explain why the free-rider problem leads to market failure.
   Show answer

   Because a public good is non-excludable, people can enjoy it without paying, so they have no incentive to pay. Private firms cannot earn enough revenue to cover costs, so the good is under-provided or not provided at all, even though society values it.. Non-excludability, then the firm's revenue problem, then the outcome.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.