Unit 6 · Topic 6.3

6.3 Public and Private Goods

Economists sort goods by two questions: does one person's use leave less for others (rival), and can people who don't pay be kept out (excludable)? Public goods are neither, so free riders can enjoy them without paying and markets underprovide them. Common resources are rival but not excludable, so they get overused.

Key terms

rival good
excludable good
public good
free-rider problem
common resource
tragedy of the commons

Rival and excludable

A good is rival if one person's use leaves less for others. If you eat a slice of pizza, nobody else can. A good is excludable if the seller can stop people who don't pay from using it. A movie theater can turn you away at the door.

Put the two questions together and you get four types of goods. The exam focuses on private goods, public goods and common resources; club goods complete the grid but are less likely to come up.

Type	Rival?	Excludable?	Examples	Market problem
Private good	Yes	Yes	Pizza, shoes, phones	None; markets work well
Public good	No	No	National defense, a fireworks show, flood control	Free riders; markets underprovide
Common resource	Yes	No	Ocean fish, public grazing land, groundwater	Overuse (tragedy of the commons)
Club good	No	Yes	Streaming services, a toll road with no traffic	Markets can provide them, but charging keeps out some people who could use them at no extra cost

Public goods and the free-rider problem

A free rider is someone who benefits from a good without paying for it. Since a public good is non-excludable, a free rider can't be stopped. Since it's non-rival, their use doesn't take anything away from others.

So why pay? If a private company tried to sell flood protection to a town, many residents would refuse to pay, figuring they'd be protected anyway. The company couldn't collect enough revenue to cover its cost, so it wouldn't build the levee, even if the levee was worth more to the town than it cost. The market provides too little or none at all.

Because everyone uses the same unit of a public good, its value to society is the sum of what it's worth to each person who benefits. If that total is more than the cost, it's efficient to provide it.

That's why public goods are often paid for with taxes and provided by government. Taxes solve the free-rider problem because they aren't voluntary.

Common resources and the tragedy of the commons

A common resource is rival but non-excludable. Anyone can use it, and whatever one person takes is gone for everyone else.

Each fishing boat, for example, gets the full benefit of the fish it catches but bears only a tiny part of the cost of a smaller fish population later. So each one catches too much, and the fish stock collapses. This overuse is called the tragedy of the commons. It's like a negative externality: each user pushes costs onto all the others.

Fixes: catch limits or quotas, permits or fees for use, or turning the resource into property someone owns and protects.

'Public' doesn't mean 'government-provided'

Public goods are defined by the two properties, not by who provides them. Public schools, the post office and public housing are provided by government, but they're rival and can be excludable, so economists don't call them public goods. And a private company's fireworks show, visible from all over town, is a public good.

Worked examples

Try each one yourself first, then open the solution.

Example 1
Should the streetlight be built?
Three neighbors live on a dark street. A streetlight would cost $75. It's worth $40 to Ana, $30 to Ben and $20 to Cara. (a) Is the streetlight a public good? (b) Is it efficient to build it? (c) Will it get built if each neighbor decides alone whether to buy it?
Show the solutionHide the solution
1. Step 1: (a) Yes. Light falling on the street isn't used up when one person benefits (non-rival), and you can't keep a neighbor from seeing it (non-excludable).
2. Step 2: (b) All three benefit from the same light, so add up their values: 40 + 30 + 20 = $90. That's more than the $75 cost, so building it adds $15 of surplus. It's efficient to build.
3. Step 3: (c) No one values it at $75 or more alone, so no one buys it by themselves. And each neighbor has a reason to hide their true value and hope the others pay: the free-rider problem.
4. Step 4: A fix: a tax or required fee that covers the $75 cost lets the light be built, and the street as a whole gains $15 of surplus.
Answer: (a) Yes, it's a public good. (b) Yes: total benefit $90 > cost $75. (c) Probably not, because of the free-rider problem; a tax or required fee can fund it.
Example 2
Classifying goods (classic trap)
Classify each good: (a) a city-run swimming pool that charges admission and gets crowded on hot days, (b) a lighthouse warning ships away from rocks, (c) fish in a lake that anyone may use, (d) a private satellite radio subscription.
Show the solutionHide the solution
1. Step 1: (a) Crowded means rival; admission means excludable. It's a private good, even though the city runs it.
2. Step 2: (b) One ship seeing the light doesn't dim it for others (non-rival), and the keeper can't stop any ship from seeing it (non-excludable). Public good.
3. Step 3: (c) Fish one person catches are gone (rival), but no one is kept out (non-excludable). Common resource.
4. Step 4: (d) One more listener doesn't reduce anyone else's signal (non-rival), but non-subscribers are blocked (excludable). Club good.
Answer: (a) Private good. (b) Public good. (c) Common resource. (d) Club good.

Common mistakes

Calling something a public good because the government provides it. Check the two properties: non-rival and non-excludable.
Mixing up public goods and common resources. Both are non-excludable, but common resources are rival and get overused, while public goods are non-rival and get underprovided.
Defining a free rider as someone who doesn't want the good. A free rider wants it and benefits from it, but doesn't pay.
Saying public goods are always underprovided by government. The problem is that private markets underprovide them.

On the exam

Expect to classify goods as rival or non-rival and excludable or non-excludable, and to explain why private markets underprovide public goods (the free-rider problem).
When explaining the tragedy of the commons, say that each user gets the full benefit of using more but shares the cost of overuse with everyone else.

Connected topics

Videos

Micro 6.3 Public Goods (Rival vs Non-rival and Excludable vs Non-excludable goods)
ReviewEconWatch on YouTube (opens in a new tab)
Public and Private Goods- Micro Topic 6.3
Jacob CliffordWatch on YouTube (opens in a new tab)
Rival and excludable goods
Khan AcademyWatch on YouTube (opens in a new tab)
A Deeper Look at Public Goods
Marginal Revolution UniversityWatch on YouTube (opens in a new tab)
6.5 Public Goods and the Free-Rider Problem
AP Microeconomics with MIT Professor Jon GruberWatch on YouTube (opens in a new tab)
The Tragedy of the Commons
Marginal Revolution UniversityWatch on YouTube (opens in a new tab)