ChainWhat it assumes · how to break it
Start
A town needs street lighting; once a street is lit, everyone who walks down it benefits, whether or not they have paid.
1
As a result, a private firm cannot stop people who have not paid from using the light, because street lighting is non-excludable.
non-excludability
non-excludability
Assumes: There is no practical way to exclude non-payers.
But: Technology can make some goods excludable, such as road tolls or encrypted television, so a market can then work.
2
This means each person has an incentive to wait for others to pay and then use the lighting for free.
free rider problem
free rider problem
Best link to attack
Assumes: People act only in their own self-interest.
Assumes: People act only in their own self-interest.
But: Small communities can fund shared goods voluntarily, such as residents paying jointly for a private security patrol, because social pressure limits free riding.
3
Consequently, a private firm cannot collect enough revenue to cover its costs, so it has no profit incentive to provide the lighting.
profit motive
profit motive
Assumes: Firms provide only what they can sell at a profit.
But: A firm may provide a public good funded another way, for example a shopping centre lighting its own car park to attract customers.
4
Therefore, the market fails to provide street lighting at all, a missing market, even though its social benefit exceeds its cost.
missing market · under-provision
missing market · under-provision
Assumes: No one else steps in to provide it.
But: In practice local councils provide street lighting funded by taxation, so the missing market is filled by the state.
End
There is a missing market: street lighting is under-provided or not provided at all, so too few resources are allocated to it.
Evaluation chain
- E1However, the free rider problem depends on how many people benefit and whether they can see who pays.
- E2If the users are few and know each other, they can agree to share the cost and social pressure stops people refusing to pay.
- E3As a result, some public goods are provided without the state, for example by residents' groups or neighbouring businesses.
- E4So the market fails to provide the good where users are many and anonymous, but may provide it where users are few and can be identified.
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Questions this answers
- Explain why public goods may not be provided by the free market.
- Analyse how the free rider problem leads to market failure.
- Assess whether flood defences should be provided by the government.
Diagram
No standard diagram. Explain non-excludability and non-rivalry using a clear example such as street lighting or flood defences.
Reverse and related
Private good (excludable and rival) → firms can charge every user, so the market provides it.