Public Goods and the Free-Rider Problem

A lighthouse, national defense, and fireworks displays share two traits. Nobody can be stopped from seeing the lighthouse beam even if they paid nothing for it, that's non-excludable. And one ship using the light doesn't dim it for the next ship, that's non-rival. Put those together and a private firm can't make money building it: everyone has an incentive to wait for someone else to pay, then enjoy it free. This is the free-rider problem, and it means the market, left alone, provides less of the good than people actually want, or none at all.

Because the good is non-rival, everyone consumes the same unit at the same time, unlike a hot dog that one person eats and another can't. So to find society's total willingness to pay for a given quantity, you add each person's value for that unit vertically, not horizontally like you would for private goods where you add up how many units people buy at a given price. Vertical summing stacks each person's dollar value for the same unit on top of the others, giving the true social benefit of providing it.

This connects directly to the externality logic from earlier in the unit: non-excludability creates a wedge between private incentive and social benefit, much like a positive externality does, and the policy fix is similar, government provision or funding through taxes rather than relying on voluntary private purchase. It also sets up the contrast with common resources, which are non-excludable but rival, and face a different failure, overuse, rather than underprovision.