A public good passes two tests: it is non-excludable (you cannot stop people using it) and non-rival (one person using it leaves as much for everyone else). Because of those two features, a private seller struggles to charge for it.
This lesson is part of market failure concepts. It follows explaining under-consumption, because a public good is the extreme case where the market may provide too little.
How do you run the two tests?
For any example, ask:
- Can the provider stop non-payers from using it? If yes, it is excludable.
- Does one more user reduce what is available to others? If yes, it is rival.
Then place the example in a 2 by 2 grid.
| Rival | Non-rival | |
|---|---|---|
| Excludable | Private good | Toll-type good (for example a paid streaming service) |
| Non-excludable | Shared resource (for example open fishing waters) | Public good |
Use the grid language only if your syllabus year asks for it. The two tests are the core.
Worked example: the Pulau Senja lighthouse
Pulau Senja is a fictional island. Its lighthouse beam helps every boat passing at night.
Test 1, excludable? The beam shines on any boat in range. The operator cannot switch it off for one boat and leave it on for another. So it is non-excludable.
Test 2, rival? A second boat seeing the beam does not dim it for the first. So it is non-rival.
Conclusion: the lighthouse beam is a public good.
Now the numbers. Running the lighthouse costs RM 4,000 a year. There are 200 boat owners and each values the beam at RM 30 a year.
- Total benefit = 200 × 30 = RM 6,000.
- Cost = RM 4,000.
- Net benefit = 6,000 − 4,000 = RM 2,000, so providing it is worth it for the community.
- Equal share of the cost = 4,000 ÷ 200 = RM 20 each, which is less than the RM 30 each person values it.
Yet suppose payment is voluntary. Each owner thinks, “The beam helps me whether I pay or not.” If only 100 owners pay RM 20, they raise 100 × 20 = RM 2,000, which is half of the RM 4,000 needed.
The lighthouse cannot run. That is the free-rider problem: a good that is worth more than it costs is not provided.
In a stated model, describe the problem and the gap. Do not announce who should fix it unless the question asks for a modelled option.
The mistake to watch for
Mistaken answer: “A ferry is a public good because many people use it.”
The student confused “used by many” with the two tests.
Correction: a ferry is excludable (no ticket, no ride) and rival (a seat taken is a seat lost). It is a private good even though thousands ride it. Another trap is a crowded public park. Entry may be free and non-excludable, yet at busy times extra visitors reduce others’ enjoyment, so it is not perfectly non-rival.
Check yourself
1. Test a fictional street lamp on a village road at night. Is it a public good?
Show answer
It is non-excludable, because the light cannot be directed only at payers, and non-rival, because one person walking by does not use up the light. It is a public good.
2. A fictional fish stall sells grilled fish at RM 8 a portion. Apply the tests.
Show answer
Excludable, because no payment means no fish. Rival, because one portion eaten cannot be eaten again. It is a private good.
3. A public good costs RM 9,000 and 150 households each value it at RM 80. Is it worth providing, and what share per household covers the cost?
Show answer
Total benefit = 150 × 80 = RM 12,000, which exceeds RM 9,000, so it is worth providing. Equal share = 9,000 ÷ 150 = RM 60, below each household’s RM 80 valuation.
Where this leads next
Next, look at a failure that comes from what buyers do not know in describing information failure in a fictional market. The ratios with interpretation limits tool can help you compare benefit and cost.
Students who know the definitions often lose marks on borderline examples. In online one-to-one Economics tuition, a teacher can pose edge cases and listen to your reasoning, not just your final label.