Public Goods

The notion of public goods encompasses a range of goods that markets fail to allocate efficiently because they are nonrivalrous and nonexcludable in use. Goods that have these characteristics absolutely are termed pure public goods. A good is nonrivalrous [Page 766]when more than one person can derive benefits from its consumption when its supply does not change. As such, prices do not serve their normal allocative function. Further, a good is nonexcludable when its use by one consumer does not preclude its use by another. These two characteristics cause either undersupply by the market, as firms cannot receive a return on the investment needed to produce the good, or congestion, as too many consumers attempt to use the good. Rationally, suppliers will always prefer to allow others to invest in the production of the good and then free ride on the resulting benefits.

A classic example of a pure public good is national defense. Members of society benefit from the production of national defense. However, no consumer can exclude another from receiving the benefits, and each additional tank or plane benefits citizens equally.

Pure public goods are generally rare and economists have created a number of useful subdivisions that describe a good by its excludability and rivalrousness. Nonexcludability and rivalrousness leads to open access, common property resources, and free goods. Excludability and nonrivalrousness characterizes toll goods such as a bridge. Public goods also have a regional quality to them, and economists generally distinguish between local, regional, national, international, and global public goods.

Economists have identified two instances in which public goods may be supplied by the market. In the first case, one consumer would purchase the good no matter the free riding resulting from subsequent benefits accrued by other consumers who cannot be excluded. In the second case, if a group of consumers is small enough, pressure can be brought to bear on those who do not contribute, and each marginal contribution can make a significant difference.

In light of the free-rider problem, there are four possible strategies of intervention. The first involves government provision after collection of contributions from varied consumers in the form of taxes. One problem with this mode of intervention is that it is difficult to ascertain the amount of demand for a good and thus how much to supply. A second strategy involves government subsidies to private firms to encourage them to produce the public good. A third mode involves the aforementioned privileged group. Fourth, the government can create excludability through legislation. Intellectual property schemes follow this model by prohibiting the free flow of information as a pure public good.