Economic Systems and Market Failure: Question 9

Worked solution

Part (a): The two properties of a public good

A public good must satisfy two properties at once:

• Non-excludable: once street lighting is installed along a road, it is impossible (or far too costly) to stop any pedestrian or driver using that road from benefiting from the light, whether or not they personally paid towards it.
• Non-rival: one resident walking under a streetlamp and benefiting from its light does not reduce the light, or the benefit, available to another resident using the same street at the same time. The good is not “used up” by one person’s consumption.

Street lighting satisfies both: it cannot practically be switched off for non-payers while staying on for payers, and any number of people can benefit from the same lit street simultaneously.

Part (b): The free-rider problem

Because street lighting is non-excludable, once it exists anyone using the road benefits from it, regardless of whether they contributed to its cost. This gives each resident an individual incentive to let their neighbours pay for the lighting while they themselves avoid paying but still enjoy the light. This is the free-rider problem.

If a private firm tried to install street lighting and charge residents directly for it, it would run into exactly this problem: since paying does not get a resident any benefit that a non-paying neighbour does not already get, rational self-interested residents would refuse to pay voluntarily, hoping others will fund it instead. If most residents reason this way, the firm collects far too little revenue to cover the cost of installing and running the lights, so it would not find street lighting profitable to provide, even though residents, taken together, clearly value having lit streets.

Part (c): Why government provision funded by taxation is used instead

Because the free-rider problem means an unregulated private market would under-provide, or fail to provide at all, a good that residents genuinely value, the council instead installs and maintains the street lighting itself and pays for it out of general taxation. Every taxpayer contributes to this fund regardless of whether they would have chosen to pay voluntarily for lighting outside their own house. This removes the option to free-ride, since payment is compulsory rather than optional. As a result, the good can be funded at a level closer to what residents collectively value, correcting the market failure that a private, price-based system could not solve.

Final answers

• (a) A public good is non-excludable (no one using the road can be stopped from benefiting from the light) and non-rival (one person’s benefit doesn’t reduce another’s).
• (b) The free-rider problem: because no one can be excluded, residents have an incentive to let others pay while still benefiting, so a private firm cannot collect enough voluntary payment to make provision profitable.
• (c) The council provides street lighting directly and funds it through compulsory general taxation, removing the option to free-ride and ensuring the good is actually provided.