Private Sector Provision of Public Goods

Private Sector Provision of Public Goods

Let us consider a Fourth of July fireworks display. Suppose a firework show is worth $10 to Bob, $7 to Susan, $3 to John and $0 to Sally. By adding these values together, we find that the social value of the firework display is $20. However, the firework display is a public good (one simply has to look up to receive the benefit).

Social Value for Firework Display

Due to the non-rival and non-exclubable attributes of this good, we will likely see Bob, Susan, and John actually paying much a lower amount than their "value" or not at all knowing they could receive the same benefit for nothing. We expect the contributions to the firework display will be lower than the efficient $20. This is known as the free-rider problem. It is challenging to correct for the free rider problem because it is difficult to know what value people actually place on a public good; how much would someone be willing to pay if the good were rival and excludable (private).

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