Another collection of market failures go by the name 'externalities and public goods'.

👉‍Non-excludability

Public goods are non-excludable. This implies that once one consumer has purchased the product, all other consumers cannot be prevented from benefiting from that product

👉‍Non-diminishability

That one person's consumption does not diminish the availability of the good for other consumers, and that it is impossible to prevent the consumption of it. Example: lighting and broadcast TV

👉‍The free-rider problem

The free market may also not be able to produce public goods because of the free-rider problem.

Public goods are impossible to provide to just one person; if you provide them to one person, you have to provide them to everybody. (Think of a fireworks display, for example.) The problem is that most people try to get the benefit without paying for it.


👉‍Examples of Public Goods

🪖National Defence.  Everyone in the country benefits when the country is protected from invasion.
Lighting for the streets. You can't stop people from using streetlight. Walking under a street light has no effect on how much light is available to others.

👮‍Service of the police. Everyone in the community will benefit from increased security and reduced crime if law and order is maintained.

🏊‍‍Flood defences – Keeping the coastline safe from flooding benefits the entire community.
The internet.  When websites are provided, anyone can view them for free, without reducing the amount of information available to others. (assuming a person has free access, which isn't always the case)

👉‍Misconception

Students often wrongly define a public good as a good that is provided by the government. The word 'public' in 'public good' refers to the fact that members of the general public cannot be excluded from enjoying the good's benefits. It is this that causes market failure.

Education and healthcare are both private goods and merit goods. They are both excludable and rival. Although it does not generally happen in the NHS, it is perfectly possible to deny someone access to a doctor if they refuse to with pay — the service is excludable. Also, if an individual has a consultation with a doctor, this reduces the time the doctor has available to see other patients healthcare the marginal cost is not zero and the service is rival. Both education a healthcare can and are provided through the market mechanism.

👉‍Direct provision of public goods

To correct the market failure, governments often provide public goods. Government-provided goods include public goods such as defence, police and roads, but they also include merit goods such as education and healthcare.