Market Failure
Public Goods
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How to define goods?
Goods can be excludable and rival. If goods are considered excludable it means that producers provide the goods to buyers who pay for the benefit of the product. For instance, a cinema is an excludable product as only buyers who pay to see see the movie can enter.
Similarly, if goods are considered non-excludable, this means that means that producers cannot stop buyers from using the product. This means that 'free-riders' can benefit from the product without paying for the good. For example, a public road doesn't need people to pay for the good to use it.
Goods can also be considered rival or non-rival. Non-rival goods mean that one consumers use of that good doesn't prevent someone else from benefitting from the good. An example of this is netflix, as more than one person can watch the same movie. Rival goods means that buyers consumption prevents others from using the same good. The best example of this is food becuase when it has been eaten, other people can benefit from the product.
Public Goods
Public goods are non-rival and non-excludable. This means that consumers do not need to pay for the product, as well as allowing multiple people to benefit from the same product without preventing others from using the good.
Examples of public goods include, public roads, lighthouses, footpaths or streetlights.
Market Failure
Public goods are examples of market failure as providers of the product cannot make a profit. This means that no price can be set for the goods becuase they are provided for free. However, some public goods can be expensive to provide, for instance, streetlamps are expensive to run and set up, yet people benefit from them free of charge.
Due to no economic return, providers may be reluctant to set up public goods. To ensure that goods are still provided governments may:
Provide the goods themselves.
Organise with private companies to construct the goods under contract law.