Question

What is the economist’s definition of public goods? Why are public goods associated with market failure?

How do the free rider problem and shirking contribute to this form of market failure?

Answer 1

A public good is a commodity that can be used by a person without limiting its accessibility to others and no one is deprived of. Public goods examples include law enforcement, national defence, sewer systems, and public parks. Public goods are almost always financed publicly, as these examples reveal. Market failure is the economic situation defined by the inefficient distribution on the free market of goods and services. The individual incentives for rational behavior do not result in rational results for the group in market failure.

Externalities, monopoly, information asymmetries, and immobility factor are commonly cited market failures. A market failure that is easy to explain is the issue of public goods. Public goods are goods or services that, if produced, can not be restricted by the manufacturer to paying customers for their consumption and for which consumption by one individual does not restrict consumption by others. If some people decide not to pay but to use the good anyway, public goods cause market failures. National defense is one such public good because, regardless of how much they pay, each citizen receives similar benefits. Privately producing the optimal amount of national defense is very difficult. Since governments are unable to use a competitive price system to determine the right level of national defense, they also face major challenges in producing the optimal amount. This may be an example of a non-pure solution market failure.

The free-rider problem in the social sciences is a type of market failure that occurs when those who benefit from resources, public goods, or communal services do not pay for them. Free riders are a problem because they may continue to access it while they don't pay for the good. The positive can therefore be known, overused or deteriorated. The issue of free-rider in social science is how to limit free riding in these conditions and its negative effects. The problem of free-rider may arise if property rights are not clearly defined and imposed.