AQA A-Level Economics · Revision notes

4.1.8.3 Public Goods, Private Goods and Quasi-Public Goods

Some goods would not be provided at all if it were left to the free market, even though people value them. Street lighting, national defence and flood defences are examples. This page explains what makes these goods different, using two characteristics, why private firms will not supply them, how some become quasi-public goods, and why shared resources tend to be over-used.

Private goods and public goods

Most goods are private goods. They have two characteristics:

• Excludable: people who do not pay can be prevented from consuming the good. A shop will not hand over a sandwich unless it is paid for.
• Rival: one person's consumption reduces the amount available to others. Once a sandwich is eaten, no one else can eat it.

Public goods have the opposite characteristics:

• Non-excludable: once the good is provided, it is impossible, or very costly, to stop people who have not paid from benefiting. A street light lights the pavement for everyone who walks past.
• Non-rival: one person's consumption does not reduce the amount available to others. One more person benefiting from national defence does not leave less defence for anyone else.

The free rider problem

Because public goods are non-excludable, people can benefit from them without paying. A free rider is someone who consumes a good without paying for it.

If a private firm tried to sell street lighting, each household would reason that the lights will shine on their street whether or not they pay. So most would refuse to pay and wait for others to fund it. If everyone thinks the same way, almost no one pays, and the firm cannot cover its costs.

Key idea: As a result, a private firm has no incentive to provide the good, and the market fails to provide it at all. This is complete market failure, also called a missing market: there is a demand for the good, but no market supplies it.

Non-rivalry adds to the problem. Because one extra user costs nothing to serve, the marginal cost of providing the good to one more person is zero, so it would be inefficient to exclude anyone even if it were possible.

How public goods are provided

Because the market will not provide them, public goods are usually provided by the government and paid for through taxation. Everyone who benefits contributes through the tax system, which removes the free rider problem.

Evaluation: The government then faces the difficulty of deciding how much to provide. With no market price, there is no direct signal of how much people value the good, so the decision rests on judgement and political choice.

Quasi-public goods

Many goods have some, but not all, of the characteristics of a public good. These are quasi-public goods (or non-pure public goods).

• Roads are largely non-excludable and non-rival when quiet, but become rival when congested. They can also be made excludable through tolls.
• Public parks and beaches are non-rival until they become crowded.

Technology can change the classification. Television broadcasts were once non-excludable, but encryption and subscription services have made them excludable.

The tragedy of the commons

Some resources are non-excludable but rival, such as fish in the open sea, common grazing land or clean air. Nobody can easily be stopped from using them, but each person's use leaves less for everyone else. Because no one owns the resource, each user gains the full benefit of what they take but bears only a small share of the damage. The result is over-use, and the resource may be exhausted. This is the tragedy of the commons, and it helps explain environmental market failures such as over-fishing and the collapse of fish stocks.

Key terms

Common mistakes

• Calling anything provided by the government a public good. Health care and education are provided by the state but are rival and excludable, so they are not public goods.
• Confusing public goods with merit goods. A merit good is under-consumed because of information failure; a public good is not provided because of non-excludability.
• Stating the characteristics without the free rider problem. The free rider problem is the reason the market fails to provide the good.
• Mixing up the two characteristics. Non-excludable is about who can be stopped from using it; non-rival is about whether use by one person reduces what is left.

How this has been examined

In the AQA papers indexed on this site, this topic has appeared in two formats:

• 15-mark "Explain" essay — asked once (2025)
• 1-mark multiple choice — asked 4 times across 4 series (2017 to 2021)

Where this goes next

Under-provision of public goods is introduced as one cause of market failure in 4.1.8.2 The meaning of market failure, and the difference between public goods and merit goods is developed in 4.1.8.5 Merit and demerit goods. The link between missing property rights and environmental damage is covered in 4.1.8.4 Positive and negative externalities in consumption and production. State provision as a form of government intervention is covered in 4.1.8.9 Government intervention in markets, and government spending more generally in 4.2.5.1 Fiscal policy.