Introduction to Public Goods and Externalities

What you’ll learn to do: define and give examples of public goods and externalities

Image of a highway with six lanes of traffic. Seven cars and one semi-truck are traveling on the highway.

Figure 1. Roads are an example of a public good.

We’ve learned that free markets are socially optimal (or more specifically, allocatively efficient) because they provide the quantity of output that maximizes the social surplus. In this section, we will learn about how markets for certain products, i.e. public goods and goods with externalities, can fail to provide the socially optimal quantity of a product.