Nonpayer nonexcludability and the resulting free-rider problem mean that public goods can not be efficiently exchanged through markets. Public goods can not produced by private business producers then offered for sale over a market like private goods. Once produced, buyers are able to consume public goods and thus have no reason to pay. With private goods, private business producers can refuse to transfer ownership without payment. Not so for public goods. Once produced everyone consumers public goods.

A Public Good Review

More to the point of the free-rider problem, public goods are also characterized by the inability to exclude nonpayers, meaning anyone can enjoy the benefits of public goods whether or not they pay.

For example, the protection from foreign invasion extended to Edgar Millbottom by virtue of a strong national defense extends to Alicia Hyfield, as well. As citizens and residents of the country, Winston Smythe Kennsington III, Jonathan McJohnson, and Pollyanna Pumpernickel are also protected.

More over, as citizens and residents of the country, Edgar, Alicia, Winston, Jonathan, and Pollyanna are all protected regardless of whether they pay or how much they pay for national defense. The only way to exclude residents from enjoying the benefits of national defense is to eliminate their resident status, that is, boot them from the country. For all practical purposes, nonpayers can not be excluded from receiving the benefits.

Riding for Free

By their very nature, public goods provide members of society with a "free ride." And for an efficient allocation of resources, public goods should provide people with a "free ride." Because the opportunity cost of consumption is zero, efficiency dictates that the price of consumption should also be zero.

A Market for Public Goods?

Quotation marks are used for several terms in the preceding paragraph, because the free-rider problem prevents this "market" from working like a market should work. The key is that regular markets are voluntary. Buyers decide to buy or not to buy. They voluntarily choose whether or not to make payment and to purchase the good.

Suppose, for example, that Edgar Millbottom is faced with this voluntary decision. He can choose to pay $100 to purchase national defense or not. If he pays $100, then he receives the benefits of national defense protection. However, if he decides NOT to pay $100, then he still receives the benefits of national defense protection.

As a human being who prefers more to less, it makes sense that Edgar chooses NOT to pay the $100. If he pays, he receives national defense. If he does NOT pay, he can receive national defense PLUS other good purchased with the $100, such as an MP3 player.

Suppose then that half of the 300 million residents of the country make the same choice, which they are free to do in this voluntary market. As such, the $30 billion national defense budget must now be divided among 150 million citizens making voluntary payment, a "price" of $200 each. In accordance with the law of demand, a higher price is bound to reduce the quantity demanded, that is, fewer citizens will voluntarily opt to pay this higher $200 "price."

For sake of argument, let's say that half of the remaining 150 million choose not to pay. The $30 billion budget is now divided among 75 million voluntary "buyers," generating a "price" of $400 each. This higher price prompts more to voluntarily choose not to pay, which places the payment burden on fewer and fewer voluntary "buyers." Eventually, when the "price" reaches $30 billion for the last voluntary "buyer," that person is also likely to opt out, making every resident a free rider.

An Involuntary Alternative

The key implication though is that the free-rider problem prevents public goods from being produced and exchanged in the same way as private goods -- through markets. Public goods are fundamentally different from private goods and can not be exchanged through voluntary markets. The provision of public goods requires governments to impose mandatory taxes. The benefits obtained from public goods, combined with the free-rider problem helps to explain the creation and (at the very least) the continued existence of governments.

A Note on Common-Property Goods

Other Market Failures

• Market Control: Market control arises when buyers or sellers are able to exert influence over the price of a good and/or the quantity exchanged. An extreme example of market control exists with monopoly, a market with a single seller. Market control prevents a market from equating demand price and supply price.


• Externality: An externality exists if a benefit is not included in the demand price or a cost is not included in the supply price. This means that the demand price does not reflect all benefits of a good or the supply price does not reflect all opportunity cost of production. As such, market equilibrium does not achieve an efficient allocation.


• Imperfection Information: The lack of information among buyers or sellers often means that the demand price does not reflect all benefits of a good or the supply price does not reflect all opportunity costs of production. That is, buyers might be willing to pay more or less for a good because they don't know the true benefits generated. Or sellers might be willing to accept more or less for a good than the true opportunity cost of production.