[MUSIC] Let's explore a little deeper why a public good results in market failure. Let's start with the issue of non-excludability. If a good is non-excludable, the value of the good to society is the sum of the values for everyone in the society. In other words, if everyone can consume a unit of a public good the marginal benefit for the economy is the sum of the marginal benefits of each person. Because everyone simultaneously consumes the good. Let's go through a numerical example. Here I have a society of two people, Lisa and Max, and they're deciding how many satellites to pay for. Suppose the price of a satellite is $65 per satellite. They both know that once there's a satellite up in the sky they will have better communication. If they had to pay for the satellite privately they would compare the cost of the satellite, $65, to the marginal benefit that they individually get from the satellite. And we can see in this table that Lisa will decide to purchase one satellite, and Max won't buy any satellites. The result will be one satellite up in the sky, and because our assumption is that this is non-excludable, both Lisa and Max will get a benefit from it. Let's try and think what the efficient outcome would be. So here I have Lisa and Max stacked one on top of the other. And what I'm showing here is the sum of their marginal benefits. Because I know that once the satellite is up in the sky, they can simultaneously enjoy the benefit. Of better communication. At a price of $65 per satellite, we can see that our society should go ahead and purchase not just the first satellite and the second satellite but actually three satellites. For efficiency we want the sum of the marginal benefits to equal the marginal costs. And we can see that the private market is under producing. And we need some other mechanism to come and let us and help us achieve the efficient amount of production.