microeconomics, public-policy, public-goodsOccasionally, I run into economists in positions that can affect public policy who seem to be confused about fundamental definitions. One most commonly misunderstood concept is that of “public goods”: Too many Ph.D. economists think the phrase means “government produced goods”.
What are public goods? Why do they matter?
It would be good to add examples of public goods provided by the private sector and private goods produced by governments, to emphasize the distinctions between the nature of the good and who supplies it.
Public goods are non-rivalrous and non-excludable. This means that anyone’s use of the good does not prevent others from also doing so, but they cannot be prevented from benefitting. Public goods are associated with positive externalities in a transaction. Because those who pay for public goods do not get the full benefit themselves, public goods are under-produced. Government is one way to solve this problem.
The classic example is street-lighting. Everyone benefits from being able to see at night, but each individual does not derive so much benefit that they would unilaterally spend a fortune to light the roads that they use most often. Assuming everyone thinks along the same lines, no street lights are ever installed, and everyone is worse off. Hence, a public good.
Street lighting would no longer be a public good if it were possible to charge users, for instance, if you could develop a pre-pay payment system for turning on street lights only as you walked past them.
Considering the existence of public goods is of particular relevance for the protection of the environment. Spending on technology to reduce CO2 emissions clearly falls within this category. National armed forces are also public goods.
Public goods are closely related to the free-rider problem, and have an impact both in over and under consumption. For instance, because the long-term potential costs of climate change are not contained within the supply price of electricity, the price is lower and hence the quantity higher than the social optimum. Conversely with street lighting, each individual’s demand is lower than the overall demand (which would consider the sum of how useful everyone finds street lights), hence they are under-consumed.
“What are Public Goods?”
Public Goods are non-rival (if I consume the good, it doesn’t prevent you from consuming it or diminishing your enjoyment from that consumption) and non-excludable (no person can be prevented from consuming the good).
Examples:
There are many examples of private goods which are government provided. Most governments in the world are producers and/or wholesalers in the oil market.
“Why do they matter?”
Public goods lead to market failure for two reasons:
One, because public goods are non-rivalrous, once produced their marginal cost is zero. So it is efficient to provide existing public goods for free, which the market won’t do. Thus, non-rivalry leads to market failure and is an argument for government provision.
Two, because public goods are non-excludable, market provision would suffer from the free-rider problem: no one will want to pay for the good, hoping that others will. Another reason why the market would fail to produce the good efficiently.
[Websites like facebook escape the above criticism because in reality we are not the consumers but the product (to be sold to advertisers). So they provide a public good to us in exchange for our attention.]
Four types of good:
The reason government intervention matters is that market incentives fail with non-excludable goods.
The government can either provide public goods themselves or modify the law in such a way that public/common goods become private/club.
For example: patents make research a club, rather than a public, good.
Whether that’s a social-improving change, that’s another story entirely
Although the answers thus far have all been spot on, I would like to add a bit on the topic of a public good, and I believe this leads to quite a bit of debate. Particularly on the topic of non-rival goods, the items are often not perfectly non-rival. In fact, the definition of a public good is more theoretical than real. For example, focusing on the idea of street lamps, each lamp can only offer so much light. There is a point at which it starts to exclude. Even something as seemingly non-rival as oxygen does have a real measurable limit.
This is easily understandable when it comes to something such as an interstate. While traffic is low, the MC of one more driver is negligible, but traffic congestion has become a major issue. However, this imperfectness often leads to methods of properly allocating these goods.
A large part of the importance in public goods comes from the research in efficiently supplying them. Without a method of offering them, we would all be worse off. However, if too much goes into supplying them, we can be worse off as well.
A note about the facebook discussion above. The fact that we tend to be a product for facebook to sell should/could probably be viewed as a mechanism of charging for a public good. We collectively benefit from its existence, but charging for such websites has long been difficult. They have just found a method of doing so. However, one can use this type of public good to see some of the issues with it. There are sites that exist solely based on donation and voluntary payed memberships. There are also sites that have switched to payed memberships only. Doing the latter has often led to failure (e.g. the NY Times paywall), but voluntary memberships allow for free riding. None of these websites tend to be perfectly public and there are relatively obvious methods of charging for them, but doing so tends to have such negative effects that they are unsustainable… which circles back to them acting as public goods. For goods seen as non-essential, those best able to monetize are best able to survive, which makes them seem to be less of a public good. However, one should be careful not to forget that if the methods of monetizing the good fails, they will once again act as a public good.
I feel this fact that many public goods are not perfect public goods is quite significant. Partially, because what happens at these margins as public goods become rival can have significant negative effects. Also, because discussing only theoretical perfect public goods ignores all of the goods that typically function as public goods.
A final note on the importance of public goods via example. As stated, defense spending is often given as public. However, a major difficulty of public goods is deciding what amount of spending on a public good is optimal. For those who feel we are no safer with additional bombs an missiles, they see our current defense spending as wasteful and inefficient. However, others feel that we cannot possibly be safe enough and argue that defense spending must always be a priority since we all benefit so much from it.
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