Public Goods

Economics distinguishes between private goods and public goods. By definition, any pure public good lacks two key technical attributes that any pure private good possesses. While largely theoretical, the distinction is very important for understanding actual markets and governments. In practical terms, private goods are basically those that markets can produce and sell. Public goods are basically those for which markets will fail or at best perform below social requirements. Given such conditions of “market failure,” either governments or private clubs must act if there is to be production and distribution of the good. Real markets often require government activities of some type. Enforcement of private contracts in courts is an example. Many private goods are therefore not strictly speaking “pure.”

Pure private goods exhibit the two attributes that economists term rivalness of consumption and price exclusion. There is a buyer and a seller (i.e., an owner of the good for sale). If one consumer purchases a loaf of bread, another person cannot consume that particular loaf; a person who cannot afford to purchase does not consume bread. When higher demand for ethanol in gasoline caused the world price of corn to increase, low-income consumers in Mexico relying on corn for tortillas as a staple food had serious problems. The result in Mexico was political protests calling on the government to enact price ceilings.

Pure public goods lack both of the attributes possessed by pure private goods. National defense involves nonrival (i.e., joint) consumption and impossibility of price exclusion. A pure public good is not reduced by individual consumption, does not involve transferable property rights, and does not assign full costs to individual consumers through the price mechanism. Once a pure public good is available, multiple consumers can freely make use of the good. The behavioral prediction is that a rational consumer will “free ride” in the sense of not paying for this free use and indeed will conceal preference (i.e., demand) for the good. If so, compulsory taxation by government will be necessary (and justified).

Pure public goods such as national defense are in fact relatively rare. The broad concept of public goods is therefore further subdivided into three categories. In addition to pure public goods, such as national defense, there are club goods and common pool resources (or common goods). The concept of public goods thus includes what economists term mixed (or ambiguous) goods, which combine private and public attributes, as happens with club goods and common pool resources. (As already noted, many private goods are not strictly “pure” either.) Club goods, such as a movie theater or a toll facility, involve joint consumption but price exclusion. When one goes to a movie theater, one buys a ticket for access but sees the movie with an audience. Common pool resources, such as air, occur freely in nature. Common goods such as fish swimming freely in the ocean involve rival consumption (i.e., individual harvesting) but no price exclusion.

Pure public goods are very difficult if not impossible to produce for private profit. A business typically cannot recoup the full costs of trying to provide national defense. Businesses are unlikely to supply unprofitable public goods except in strictly limited quantities out of motives of corporate social responsibility. Some club goods (e.g., movie theaters) are suitable for business, while other club goods may require nonprofit organizations (e.g., symphonies or operas) or governments (e.g., toll bridges and roads) to produce them. There is consumer demand for the various types of public goods, but such demand is collective or social in the sense that anyone obtaining access to the good with or without payment can consume it equally and jointly. The result is often market failure or, at best, suboptimal market supply. Some form of collective (i.e., nonmarket) action through the government or nonprofit organizations typically will be needed to satisfy consumer demand for a public good that does not occur freely in nature. In the case of a common pool resource occurring in nature, collective action regulating free consumption may be needed. Unless there is effective regulation by private clubs or [Page 1731]government, there may be increasing air pollution or progressive depletion of the common pool resource (as is happening with global fish stocks).

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