Public Goods

Public goods possess intrinsic qualities that make their provision by private markets inefficient or impossible. [Page 1111]Because goods and services in this category often have high individual and social value and may in fact be necessary for the efficient operation of markets, government institutions may intervene to ensure their adequate provision.

Private production and exchange require two essential elements. First, consumption must be rivalrous. That is, if consumer A pays for a good, it goes to consumer A; consumer B cannot have it once consumer A has purchased it. Second, exclusion from consumption must operate. That is, if consumer B does not pay for a good, then consumer B can be excluded from enjoyment of the good. If you purchase a hamburger at a restaurant, you exchange a portion of your property (money) for a portion of the restaurant's property (the hamburger). Upon exchange, the hamburger becomes your property, and you eat it. The exchange is both rivalrous and exclusive: Your purchasing of the ham-burger precludes others from purchasing it, and once purchased, no one else can enjoy the benefit of eating it. If these conditions are not met, private firms do not get the signals they need through the price system to determine what quantities they can profitably produce.

Pure public goods are those whose consumption is nonrivalous and for which exclusion is not feasible. Fire protection is nonrivalrous because one citizen's being protected does not preclude others from being protected. Exclusion is not feasible because a burning house endangers surrounding houses, and therefore no one can be excluded from protection without endangering others. National defense, disease control, and criminal justice are additional examples of pure public goods; consumption is not rivalrous, and benefits cannot be feasibly withheld from nonpayers.

There are a number of goods that are neither purely public nor purely private. We can understand these cases through their relationship to the conditions of rivalry and exclusion. (See Table 1.)

In the upper right quadrant of Table 1 are those goods to which the tragedy of the commons applies. That is, they are goods for which each individual may logically seek to maximize his or her own advantage, to the eventual detriment of all. Consumption is rivalrous, yet exclusion is difficult or impossible. If one farmer pumps water out of an underground aquifer, this may lower the water table, affecting other farmers' access to water. But all farmers have a right to drill for water on their property; exclusion from the common resource is not feasible. Government may seek to impose regulations limiting the rights of individual farmers to capture ground water in order to preserve the resource at sustainable levels, making everyone better off in the long run.

In the lower left quadrant, consumption is nonrivalrous (at least to a point) but exclusion is feasible. Until the movie theater is full, additional moviegoers do not diminish one's enjoyment of the movie (nonrival consumption). It is, however, easy to exclude nonpayers, so market provision is efficient. The public sector may provide goods like roads and highways, whose consumption is nonrivalrous, but to control congestion and ensure that users pay, it may in some cases impose tolls.

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