Public goods are defined by two characteristics. One is non-excludability, which means that even those who don't pay for the goods are able to use them. The other is non-rivalry, which means that one person's use of a good doesn't reduce its availability to others. Most public goods are provided by governments – either municipal, state or federal – and financed by tax dollars. Common examples of public goods include national defense, police and fire services, and street lights. People who feel that some or all public goods should be privatized do so based on several arguments, including the desire to eliminate the free rider problem and the introduction of competition to reduce price and increase efficiency.

The fact that public goods are non-excludable is what gives rise to the free rider problem. People can use these goods or services without paying for them. For example, U.S. citizens and residents who do not pay taxes still benefit from military protection and national defense. Because many of the costs of providing public goods are fixed costs, free riders result in an increased portion of the burden of paying for them being placed on everyone else. A corollary to this issue is the forced rider problem. Through taxation, many people are forced to help pay for public goods that they do not use, such as the contributions of childless adults to public elementary and secondary schools. When the free riders outnumber those who pay, the latter have to shoulder an unreasonably high share of the cost.

Privatization of public goods would eliminate the free rider problem and, by extension, the forced rider problem, because under private ownership, providers of goods can charge customers directly and exclude those who do not pay. For example, a fire department under private ownership could charge homeowners in its service area for fire protection. Using this model, the owners can charge everyone willing to pay for the fire protection service a fair price without having to demand too much money from a subset of payers to enable service for all of the non-payers.

While competition forces businesses in the private sector to keep prices low, the public sector has no such constraints. When the government has difficulty coming up with the money to provide a particular good or service, it can simply print more money or raise taxes. Because private companies lack this luxury, their only recourse when profits are down is to improve efficiency and provide better service. The public sector is known for having massive overhead, complex procedures and excessive administrative costs. A business in the private sector, on the other hand, gets eaten up by the competition if it is unable to cut through the red tape and keep administrative costs as low as possible. Privatizing public goods, so the argument goes, assures that they are delivered to the consumer as efficiently as possible and at the lowest price the market will bear.

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