Underprovision of Public Goods

The underprovision of public goods is also a widely recognized market failure. Examples of public goods include national defense and navigational devices, such as lighthouses and buoys. In a free market economy, public goods are almost always either underprovided or not provided at all.

Public goods have two defining characteristics. First, once a public good is provided for a group of people, there is no additional cost associated with it being enjoyed by an additional individual or group of individuals. For example, once a national defense system is in place to protect a nation of 270 million people, there is no additional cost to protect an additional person born into that nation. Similarly, once a lighthouse is built to guide in all existing ships, it costs nothing for a newly built ship to benefit from its existence.

The second — and most important — defining characteristic of public goods is that once they are provided for one person, it is difficult, if not impossible, to prevent their enjoyment by additional people. A buoy in a harbor may have been put there to alert boats that they are approaching shallow waters. It is impossible, though, to prevent swimmers in the same harbor from using the buoy as an indicator that they are approaching deep waters.

Because the benefits from a public good enjoyed by any individual are almost always less than the cost of producing the public good, the market does not provide them. For example, each individual in the United States benefits from the security provided by the American national defense system. However, at the individual level, that benefit is not worth the trillions of dollars it costs to build and maintain that system. (Even if it was, no single individual could pay for such a system.) At the same time, the overall benefits of national security to the entire nation are greater than the costs of providing them. It is in the interest of the public, then, for the government to pool the resources of individuals and pay for a robust national defense system that would otherwise not be provided.

Other commonly cited examples of public goods include roads, public parks, and public education. While these are not “pure” public goods because they do not perfectly adhere to the above definition, they nonetheless share some of the same characteristics as pure public goods. These are things which are generally underprovided by the market. In these cases, there is an economic basis for governmental intervention in the economy. Such interventions generally enjoy strong public support.