Private Sector Provision versus Public Sector Provision
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).
Public Sector Provision of Public Goods
Because of private under investment in public goods, there is potentially room for government involvement. A good example of this is government provision of education. In many ways, an educated population is a public good because of the positive externalities educated people "spill-over". Educated people typically have higher incomes that result in higher property tax revenues, "educated" communities typically have lower crime levels and more voter participation.
Even with these obvious advantages in supporting education, the benefits are non-excludable and non-rival so we expect underinvestment in a private market. Without government provision of grade school education, we may expect very low attendance rates. The reason for this is many parents will have an incentive to spend the money they have from lower property taxes on their own consumption, not on their kids'. Further, it is unlikely that a child could take out a loan for his or her own education. This is just one argument for government provision of public goods. Air quality is also a public good that is under provided in a private market. There are a number of potential government responses to poor air quality