Question

What is the efficiency condition for a public good? What is the condition that describes output if the public good is delivered privately? What is free riding? How might free riding lead to even less private provision of public goods?

Answer 1

A distinctive characteristic of such goods is that they are not used up in the process of being consumed or utilized as an input in a production process. To be considered public, a good must also be of interest to more than one consumer or firm. Otherwise, the fact that the consumption possibilities of others are undiminished is irrelevant. It presents the derivation and interpretation of the efficiency conditions for pure public goods. The positive issues of the way the private market arrangements provide for public goods are discussed in the chapter. The chapter describes alternative mechanisms for making public goods decisions within the public sector. Public goods are of particular relevance to public policy, because they tend to be inefficiently provided by private arrangements, such as the market mechanism. The category of public “goods” is considered as opposed to public “bads.” Because they are not used up in the act of consumption of production, the marginal cost of extending service to additional users is zero. Private provision of the good, however, necessitates revenues from users to defray the cost of producing the good. Such charges usually lead some potential users to forgo consumption, creating a deadweight efficiency loss.

A free rider is a person who benefits from something without expending effort or paying for it. In other words, free riders are those who utilize goods without contributing their fair share.

The Free Rider Problem

The free rider problem is an economic concept of a market failure that occurs when people are benefiting from resources, goods, or services that they do not pay for. If there are too many free riders, the resources, goods, or services may be underprovided. Therefore, this would create a free rider problem. The problem is commonly seen with public goods (goods with non-excludable benefits).

Examples of the Free Rider Problem

Here are two examples of the free rider problem:

#1

John builds a lighthouse on the coast to serve as a navigational aid. As a result, all sailors are now able to benefit from the lighthouse even if they are not paying towards its upkeep. If too many sailors are free riding, there would be no incentive for John to build more lighthouses as he is the only person contributing to its upkeep.

#2

Wikipedia, a free encyclopedia, faces a free rider problem. Hundreds of millions of people use Wikipedia every month but only a tiny fraction of users pay to use it. A large majority of Wikipedia users do not pay to use the site but are able to benefit from the information provided by the website.

Public Goods and the Free Rider Problem

Public goods commonly face a free rider problem due to the two characteristics of a public good:

1. Non-rival: Consumption of the good or service by one individual does not reduce the availability of the good to others.
2. Non-excludable: It is impossible to prevent other consumers from consuming the good or service.