Public good

In economics, a public good is a good that is hard or even impossible to produce for private profit, because the market fails to account for its large beneficial externalities. By definition, a public good possesses two properties:

The Free Rider Problem

Public goods provide a very important example of market failure, in which market-like behavior of individual gain-seeking does not produce efficient results. The production of public goods results in positive externalities which are not remunerated. Because no private organisation can reap all the benefits of a public good which they have produced, there will be insufficient incentives to produce it voluntarily. Consumers can take advantage of public goods without contributing sufficiently to their creation. This is called the free rider problem, or occasionally, the "easy rider problem" (because consumer's contributions will be small but non-zero).

Related Topics:
Market failure - Efficient - Externalities - Free rider problem

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For example, consider national defense, a standard example of a pure public good. A free-rider (also known as homo economicus) is an individual who is extremely individualistic, considering benefits and costs that affect only him or her. Suppose this individual thinks about exerting some extra effort to defend the nation. The benefits to the individual of this effort would be very low, since the benefits would be distributed among all of the millions of other people in the country. Further, there is a very high possibility that he could get injured or killed during the course of his or her military service. On the other hand, the free rider knows that he or she cannot be excluded from the benefits of national defense, regardless of whether he or she contributes to it. There is also no way that these benefits can be split up and distributed as individual parcels to people. So the free rider would not voluntarily exert any extra effort, unless there is some inherent pleasure or material reward for doing so (such as, for example, money paid by the government, as with an all-volunteer army or mercenaries).

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Finally, in the case of information goods, an inventor of a new product may benefit all of society. But hardly anyone is willing to pay for the invention if they can benefit from it for free.

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