Public Goods

THERE ARE CERTAIN CASES, known as market failures, in which free markets do not efficiently allocate resources. Public goods are an example of such market failures. A free market tends to underprovide public goods (or overprovide public bads) because people do not have an incentive to pay their full personal valuation for the good. This is the free-rider problem. Examples of public goods include national defense, lighthouses, the ozone layer, vaccinations, and even abstract ideas such as the legal system, financial stability, and peace.

Globalization is increasingly interconnecting countries, which is leading to the development of global public goods. Governments can promote the efficient consumption of public goods through taxes, international cooperation, or other systems that force people to pay their true valuation. Providing the proper amounts of public goods is an important tool to combat poverty.

A pure public good has two defining characteristics. First, it is nonrivalrous, meaning that once the good is provided to one person, there is no additional cost to society for providing the good to others. Consider the services of a lighthouse: once the lighthouse becomes available to a boat at sea, other boats can also use the lighthouse without increasing the costs to the lighthouse. The other important characteristic of a public good is that it is nonexcludable. This means that once the good is provided to one person, it is not possible to prevent others from consuming the good.

For example, consider a fireworks display above a city. There is no realistic way to exclude certain people from enjoying the fireworks above their homes. As for another example, if a nation provided an army to defend itself from attack, it would not be realistic for the army to protect only one house from an invasion. Generally, all homes will be equally protected. Few goods could truly be classified as pure public goods, though [Page 881]many goods exhibit some characteristics of public goods. Note that the definition of public goods is unrelated to government provision. Some public goods are not provided by governments, and some private goods are provided by governments, such as housing subsidies and medical care. The key distinction is that private goods are rivalrous and excludable. The owner of a pizza can prevent others from eating it, and once the pizza is eaten, no one else can enjoy it.

Free markets may find it difficult to provide the efficient amount of a public good for society to enjoy. This is because of the free-rider problem. Since everyone can enjoy a public good once it is produced, members of the society have an incentive not to contribute to the cost of the public good in the hope that others will pay for the cost instead. The free market is not producing efficiently because the properties of nonrivalry and nonexcludability allow users to enjoy the benefits without internalizing the costs of their consumption.

Government policy can be used to help ensure that the appropriate amounts of public goods are provided to a society. This can be accomplished through taxation to fund the goods or through other requirements such as mandated military service by young people. Government toll roads also provide an example of the government forcing the users of a public good (a road) to pay for its costs. Governments can also subsidize the providers of public goods.

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