Public Goods

Public goods refer to goods or services that have the features of non-rivalry and non-excludability, and thus would not be provided by the free market. Non-rivalry in consumption means that the consumption of the good by one party does not reduce the amount available to others, for example, being protected by the country's defence force. When one person enjoys the security provided by the country's defence force, it does not prevent another from enjoying the same benefit at the same time, thus demonstrating non-rivalry. The marginal cost of supplying goods to another user would then be 0, at the point of allocative efficiency where P=MC=0, the socially ideal price would be 0.

Non-excludability means that there is no means of restricting the benefits of goods to only those that pay for them, meaning the good is available to all regardless of who pays or not. This can be shown through the example of streetlamps, there is no way to restrict use of streetlamps to only those that pay taxes. This feature of non-excludability generates a free-rider problem, where some individuals believe others will take on the burden of paying for public goods. People then consume the goods without paying, and demand is not expressed, making market price indefinable.

These 2 characteristics of public goods result in a missing market as no demand or supply curves can be expressed. This means that in a free market, no resources will be allocated towards production of these goods. The government would then have to resort to direct provision to ensure that the goods are still provided to the people.