Educerie · IB Diploma · Economics
Unit 2 Microeconomics · 2.9 Market failure—public goods
What you must be able to do
| You must be able to | Level | Exam form |
|---|---|---|
| Define a public good by its two characteristics, non-rivalrous and non-excludable | SL, HL | A 2-mark definition, usually with an example demanded |
| Apply both characteristics to a named good | SL, HL | Paper 1 (a); Paper 2 (b) |
| Explain the free rider problem, and why it leaves the market supplying nothing | SL, HL | Paper 1 (a), 10 marks — the standard question here |
| Explain direct provision and contracting out to the private sector | SL, HL | Paper 1 (b); Paper 2 (e), 15 marks |
| Evaluate those two responses against each other | SL, HL | Paper 1 (b), 15 marks, "evaluate" |
Before you start
You need market failure from the previous subtopic: a market left alone failing to reach the output where marginal social benefit equals marginal social cost. You also need rivalrous and non-excludable from common pool resources. Public goods are the box those two words leave empty.
1The idea in one paragraph
Some things, once they exist, cannot be sold. A sea wall protects the house that paid for it and the house next door that did not, equally, and nothing the builder does can change that. So no firm can charge for it, no firm earns revenue from it, and no firm builds it — even when the town would happily pay several times what it costs. The market does not supply too little of a public good. It supplies none. The only question left is how the thing gets built instead.
2The two properties
A public good is a good that is both non-rivalrous and non-excludable. Both words are needed, and each is a test.
Non-rivalrous means one person's use does not reduce the amount available to anybody else. Your neighbour walking under a street light leaves no less light for you.
Non-excludable means it is impossible, or so expensive that it is not worth trying, to keep a non-payer from using it. There is no gate on a lighthouse beam and no turnstile on a flood defence.
Run both tests on street lighting. Can a non-payer be kept out? No. Does one person's use leave less for the next? No. Two noes, so it is a public good. Flood defences and national defence pass the same way.
3Four kinds of good, and what "public" does not mean
Put the two properties on two axes and you get four boxes. Only one is the public good.
A private good is rivalrous and excludable: a sandwich is eaten once and sold once. A common pool resource is rivalrous but non-excludable, which is where the tragedy of the commons comes from. The fourth box, excludable but not rivalrous, has no name in your syllabus; you will meet it called a club good or a quasi-public good, and you do not need the term.
Now the sentence that costs the most marks here. A public good is not a good the government happens to provide. The two properties decide what kind of good something is; who pays for it decides nothing.
A council bus service is government-provided and is not a public good: a passenger in a seat leaves one fewer for everybody else, and you need a ticket. A commercial radio signal comes from a private firm and is a public good: advertising pays for it and any receiver in range picks it up. Health care and education are government-provided in many countries and are not public goods either. They are merit goods, which the market does supply and can charge for, in quantities that are simply too small.
4The free rider problem
A free rider consumes a good without paying for it, and can do so because the good is non-excludable. The free rider problem is everybody working that out at once: each would rather let the others pay, so too little is collected and the good is not provided.
Wren Bay needs a sea wall. A thousand households each value the protection at €60 a year, so the benefit is €60,000 against a wall costing €40,000 a year. Marginal social benefit is well above marginal social cost. Yet no firm will build it.
Follow one household. If the other 999 pay, the wall shelters my house whether I contributed or not, so my €60 buys me nothing. If they do not pay, my €60 alone builds nothing. Either way I keep the money. Every household reasons the same way, nobody pays, and a wall worth €20,000 a year more than it costs is never built.
That is market failure in its most complete form: not a quantity that is too small but a quantity of zero. There is no demand curve to draw, because nobody reveals what they would pay, and no supply curve, because no firm can collect revenue — which is why this subtopic has no diagram.
5What a government does about it
If nobody can charge, the good must be paid for by somebody who does not need to charge: a government, out of taxation. The guide gives two ways.
Direct provision means the government produces the good itself: it decides how much is needed, uses a state body to do the work, owns the result and pays from tax revenue. The armed forces are the clearest example, and so is a council that employs its own crews to maintain the street lights.
Contracting out to the private sector means the government still decides how much is provided and still pays for it, but the work goes out to tender and a private firm does it. The council signs a contract with a lighting firm to maintain the lamps to a stated standard for a stated price. The good stays publicly funded and usually publicly owned; only the doing has been sold to a competitive bidder.
6Which one is better
Neither, always, which is what makes it a fair 15-mark question.
For direct provision. The government controls the standard, the coverage and who gets access without writing any of it into a contract first, and there is no profit margin to fund. Provision also does not stop because a company has failed mid-contract, which matters for a good like flood defence.
Against it. A state body with no competitor faces little pressure to keep costs down, so spending can drift upwards unnoticed.
For contracting out. Firms compete for the contract, and competition can cut the cost of the same work and bring in expertise the state does not have. The government still decides how much is provided, so it gives up less than it looks.
Against it. A firm's aim is profit, so it will cut quality wherever the contract does not pin it down, and contracts are expensive to write and to police. If only one firm bids, the competition that justified the whole approach never happens.
What they share. Both are tax-funded, so both carry an opportunity cost, and in both the quantity provided is a political judgement rather than a market outcome, because no price signal says how much people want.
7Where marks are lost
"A public good is a good provided by the government." State schools and council buses are government-provided, rivalrous and excludable. Commercial radio is a public good with no government near it. Test the properties, never the provider.
Giving only one of the two properties. A streamed film is non-rivalrous but excludable; ocean fish are rivalrous but non-excludable. Neither is a public good, and a one-property definition is capped at one mark.
Drawing a demand and supply diagram. There is no market, so there is nothing to draw. Spend the time on the reasoning.
Confusing a free rider with the tragedy of the commons. A free rider takes nothing from anyone, which is why nobody bothers to exclude them. A common pool resource is rivalrous, so every extra user does take something away.
Stopping at "the market supplies too little". The examiner wants the chain: non-excludable, so no firm can charge; no charge, no revenue; no revenue, no supply.
Treating public goods and merit goods as the same. A merit good is supplied by the market and can be charged for, just in quantities that are too small. A public good is not supplied at all.
Answering without an example. Almost every question here says "using examples", and an answer with no named good is capped however good the theory is. It is also where the mark for "free at the point of use, but paid for by the taxpayer" usually goes missing.
8Write it right
Nothing here is drawn, so the marks sit in the order of your sentences.
- Define the public good with both properties, and name the good you will use.
- Apply non-excludability to it: say what the seller cannot stop the non-payer from doing.
- Apply non-rivalry to it: say what the extra user takes from everybody else, which is nothing.
- Name the free rider problem and walk through one person's reasoning, not just the label.
- Say what follows: no revenue, no supply, market failure, so the government provides or commissions it.
If the question says "evaluate", add a sixth step: provide it directly or contract it out, and what that choice depends on.
9Try it
Marks in brackets. Answers and marker's notes are at the end. Do them first.
Q1. Define the term public good. 2 marks
Q2. Explain, using an example, why a free market will not supply a public good. 4 marks
Q3. Explain why a good provided by the government is not necessarily a public good. 4 marks
Q4. Explain one advantage and one disadvantage of contracting out the provision of a public good to a private firm. 4 marks
10In one breath
A public good is non-rivalrous, so one more user takes nothing from anybody, and non-excludable, so a non-payer cannot be kept out. Both are needed, and neither has anything to do with who provides the good. Because nobody can be excluded, everybody has a reason to let somebody else pay — the free rider problem — so no firm can collect revenue and the market supplies nothing at all. That is market failure, and the answer is public funding: direct provision, where the state does the work, or contracting out, where the state still decides and still pays but a private firm competes to do it.
Answers
Q1. A public good is non-rivalrous, meaning one person's consumption does not reduce the amount available to anybody else, and non-excludable, meaning somebody who has not paid cannot be prevented from consuming it. Street lighting is an example. 1 for each property correctly explained, not merely named. Only one property, or "a good the government provides", scores at most 1.
Q2. Take a sea wall protecting a coastal town. It is non-excludable: once built it shelters every house behind it, including those of people who paid nothing, and the builder cannot withdraw the protection from them. So each household has an incentive to let the others pay and enjoy the wall for nothing — the free rider problem. Since every household reasons this way, few or none contribute, no firm can collect enough revenue to cover the cost, and the wall is never built even though the benefit to the town exceeds it. The market supplies none of the good, which is market failure. 1 for a named example, 1 for applying non-excludability to it, 1 for the free rider problem explained rather than named, 1 for the conclusion that no revenue means no supply. "People would not pay", with no link to non-excludability, is capped at 2.
Q3. Whether a good is a public good depends on its two characteristics, not on who pays for it. A council bus service is government-provided but rivalrous, because a passenger occupying a seat leaves one fewer for everybody else, and excludable, because a ticket is required; it is a private good the government has chosen to provide. A commercial radio broadcast comes from a private firm, yet it is non-rivalrous and non-excludable, so it is a public good. Government provision more often signals a merit good, which the market does supply but in quantities judged too small. 1 for the test being the characteristics rather than the provider, 1 for a government-provided good shown not to be a public good with a reason, 1 for a market-provided good shown to be one with a reason, 1 for development such as the merit good point. Two examples with no reasoning score 2.
Q4. One advantage is cost: firms bid against each other for the contract, and that competition, with the profit incentive to find cheaper methods, can deliver the same street lighting for less than a state body with no competitor would spend. One disadvantage is quality: the firm's aim is profit, so it has an incentive to cut standards wherever the contract does not specify them, and a contract tight enough to prevent that is itself expensive to write and police. 2 for the advantage and 2 for the disadvantage, in each case 1 for the point and 1 for the development. Credit also for expertise the state lacks, for a single bidder removing the competition, or for the difficulty of switching provider later.
Educerie · written from the published IB Diploma Programme Economics guide, first assessment 2022, section 2.9 Market failure—public goods. Original text, examples and questions. Diagrams drawn by Educerie. Last reviewed 10 September 2026.