Economists use the term Public Goods to refer to products (goods or services) that are difficult to keep nonpayers from consuming (no excludability), and of which anyone can consume as much as desired without reducing the amount available for others (no rival consumption). Examples include national defence, a clean environment, and air for breathing. Public goods are usually provided by government because a private business lacks the incentive linked to the profitability to produce them. Private businesses can't sell public goods in markets, because they can't charge a price and keep nonpaying people away. Moreover, businesses shouldn't charge a price, because there's no opportunity cost for extra consumers. For efficiency, government needs to pay for public goods through taxes.
The modern concept of public goods has its roots in 18th century scholarship and it can be traced back to classical economics. David Hume discussed the difficulties inherent in providing for “the common goods” in his Treatise of Human Nature, first published in 1739. Some 30 years later Adam Smith analysed similar questions in his Inquiry into the Nature and Causes of the Wealth of Nations. David Hume and Adam Smith agreed that government intervention is needed to supply goods and services characterized by collective benefits. If left to the spontaneous action of individuals or organizations, these goods would not be adequately provided.
After a pioneering contribution by Richard Musgrave in 1939, a modern and comprehensive theory of public goods was developed with the publication in 1954 of Paul Samuelson’s seminal paper “The pure theory of Public Expenditure”. Since then, research interest in the topic has grown rapidly. In his classic paper Samuelson defined a public good, as a good which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good. This is the property that has become known as non-rivalry.
A public good is “a commodity that can be provided to everyone as easily as it can be provided to one person”, note economists Paul A. Samuelson and William D. Nordhaus (Samuelson and Nordhaus, 1992, p. 53). According to them the case par excellence of a public good, is national defence.
National defence, differs completely from a private good like bread. Ten loaves of bread, for example, can be divided up in many ways among individuals, and what you eat cannot be eaten by others. But national defence, once provided, benefits everyone equally. It matters not at all your way of life, your age or your religion you will receive the same amount of national security from the Army as does every other resident of the country. To the extent one person in a geographic area is defended from foreign attack or invasion, other people in that same area are defended also.
So public goods are ones whose benefits are indivisibly spread among the entire community, whether or not individuals desire to purchase the public good. Private goods, by contrast, are ones that can be divided up and provided separately to different individuals, with no external benefits or costs to others. Efficient provision of public goods often requires government action, while private goods can be efficiently allocated by markets.
The Main Characteristics of Public Goods
Public goods have two distinct aspects: non-excludability and non-rivalrous consumption. Strictly speaking “non-excludability” means that the cost of keeping non-payers from enjoying the benefits of the good or service is too high so no one can be effectively excluded from using the good.
On the other hand “Non-rivalry” means that consumption of the good by one individual does not reduce availability of the good for consumption by others.
For example, if one individual visits a doctor there is one less doctor's visit for everyone else, and it is possible to exclude others from visiting the doctor. This makes doctor visits a rival and excludable private good. Conversely, breathing air does not significantly reduce the amount of air available to others, and people cannot be effectively excluded from using the air. This makes air a public good, albeit one that is economically trivial, since air is a free good. Another example is the exchange of MP3 music files on the internet: the use of these files by any one person does not restrict the use by anyone else and there is little effective control over the exchange of these music files and photo files.
Impure Public Goods
In the real world, there is hardly any “pure” public good, that is absolutely non-rival and non-excludable. Most public goods possess mixed characteristics. Goods that only partly meet either or both of the defining criteria are called impure public goods. Because impure public goods are more common than the pure type, economists usually use the term “public good” to encompass both pure and impure public goods. That is considered a useful simplification because many of the implications of publicness remain very noticeable even when a good is only partly non-rival or partly non-excludable. According to this definition we may look at “pure private” and “pure public” as the extremes of a public-private continuum. Even an activity such as consuming a nutritious meal, which at first glance seems to be highly private, upon closer examination has public benefits. Indeed, a good meal adds to people’s good health, and good health improves their ability to acquire skills and work fruitfully. This, in turn, benefits not only them but also their families and society as a whole. The immediate benefits, however, are mostly private.
Impure public goods fall into two categories (Figure 1). Goods that are non non-rival in consumption but excludable are called “Club Goods”. Goods that are mostly non excludable but rival in consumption are “Common Goods”. Such goods raise similar issues to public goods: the mirror to the public goods problem for this case is sometimes called the tragedy of the commons. For example, it is so difficult to enforce restrictions on deep sea fishing that the world's fish stocks can be seen as a non-excludable resource, but one which is finite and diminishing.
Because they are non-rival in consumption and non-excludable, public goods typically face supply problems, and so are often referred to as a case of market failure. Public goods problems are also closely related to externalities.
Externalities arise when an individual or a firm takes an action but does not bear all the costs (negative externality) or all the benefits (positive externality) of the action. For example, educating women has positive effects on child survival and on slowing population growth. Releasing pollution into a river, by contrast, can harm nature and human beings. Put differently, externalities are by-products of certain activities, spillovers into the public sphere.
Corner and Sandler argue that public goods, notably pure public goods, “can be thought of as special cases of externalities”. For most of economists, positive and negative externalities are distinguished by their positive or negative utilities to third parties. So the term “public good” is usually used for goods and activities with positive utilities, including positive externalities. If a public disutility is involved the term we will use is “public bad”.
Public bads are considered public goods that impose costs uniformly across a group. “These are unintended by-products of consumption or production activities” (Samuelson and Nordhaus, 1992, p. 30). Examples are air and water pollution that results from chemical production, energy production, and use of automobiles, and radioactive exposure to atmospheric tests of nuclear weapons or to accidents like the ones occurred at the Soviet nuclear plant in Chernobyl in 1986 or in Fukushima in 2011. Perpetrators of the “bads” do not intentionally try to hurt anyone so the externalities may be considered the unintentional but harmful side effects of economic activity.
Actually many problems that are often perceived as public-goods problems are of a different nature, and markets handle them reasonably well. For instance, although many people think a television signal is a public good, cable television services scramble their transmissions so that nonsubscribers cannot receive broadcasts easily. In other words, the producers have figured out how to exclude nonpayers. Both throughout history and today, private roads have been financed by tolls charged to road users. Other goods often seen as public goods, such as private protection and fire services, are frequently sold through the private sector on a fee basis. In some cases excluding nonpayers is possible. In other cases, potentially public goods are funded by advertisements, as happens with television and radio.
Partially public goods also can be tied to purchases of private goods, thereby making the entire package more similar to a private good. Shopping malls, for instance, provide shoppers with a variety of services that are traditionally considered public goods: lighting, protection services, benches, and restrooms are a case in point.
Charging directly for each of these services would be impractical. Therefore, the shopping mall finances the services through receipts from the sale of private goods in the mall. So the public and private goods are tied together.
The main problem affecting the provision of public goods is known in economic literature as “free riding” or “easy rider” problem.
The free rider problem depends on a conception of the human being as a purely rational homo economicus selfish, extremely individualistic and considering only those benefits and costs that directly affect him or her. Public goods give such a person an incentive to be a free rider. For example, consider national defence, a standard example of a pure public good. Suppose the homo economicus thinks about exerting some extra effort to defend the nation. The benefits to the individual would be very low, since the benefits would be distributed among all of the millions of other people in the country. There is also a very high possibility that he or she could get injured or killed during the course of his or her military service.
On the other hand, the free rider knows that he or she cannot be excluded from the benefits of national defence, regardless of whether he or she contributes to it. There is also no way that these benefits can be split up and distributed as individual parcels to people. The free rider would not voluntarily exert any extra effort, unless there is some inherent pleasure or material reward for doing so (for example, money paid by the government, as with an all-volunteer army or mercenaries). The free riding problem is even more complicated than it was thought to be until recently. Any time non-excludability results in failure to pay the true marginal value, it will also result in failure to generate proper income levels, since households will not give up valuable leisure if they cannot individually increment a good.
Corner, R. and Sandler, T. (1993), "Private Provision of Public Goods under Price Uncertainty", Social Choice and Welfare, Vol. 10, No. 4.
Kaul, I., Grunberg, I. and M. A. Stern (1999), Defining Global Public Goods, New York, Oxford University Press.
Musgrave R. A. and P. B. Musgrave (2003), Prologue in Providing Global Public Goods: Managing Organization, New York, Oxford University Press.
Samuelson P. A. (1954), "The Pure Theory of Public Expenditure", Review of Economics and Statistics, Vol. 36, No. 4, pp. 387–389 (http://www.jstor.org/discover/10.2307/1925895?uid=2&uid=4&sid=21102466212311)
Samuelson P. A. and William D. Nordhaus (1992), Economics, Sydney, McGraw-Hill.
Editor: Francesca BERTI