Public Goods

What are Public Goods?

Public goods are essential in understanding how markets can fail. In economics, a public good is a good that is non-excludable, non-rivalrous, and non-rejectable. These characteristics make public goods different from private goods, and they often lead to inefficiencies in a free market. To understand this better, let’s break down each characteristic.

Non-excludable means that no one can be prevented from using the good, even if they do not pay for it.
Non-rivalrous means that one person’s use of the good does not reduce its availability for others.
Non-rejectable means that individuals cannot refuse to consume the good once it is provided.

Because of these characteristics, public goods are often under-provided in the market. Without the ability to charge for their use, private firms usually have no incentive to provide these goods. This is why government intervention is often needed. Let’s explore these characteristics further with some real-world examples.

Characteristics of Public Goods

1. Non-Excludability

A good is non-excludable if it is impossible or very costly to prevent someone from using it, even if they don't pay for it. For example, think about national defense. Once the military defends a country, everyone benefits from it, whether or not they contributed to the cost through taxes. Because of non-excludability, national defense is typically funded and provided by the government. In the private sector, firms would be unable to charge people for defense services, and as a result, they would not provide it.

This characteristic leads to the free rider problem. In a free market, if a good is non-excludable, some individuals will enjoy the benefits without contributing to the cost, which can result in under-provision of the good. Public goods like national defense require government involvement to ensure they are provided adequately for everyone.

2. Non-Rivalry

A good is non-rivalrous if one person’s consumption does not reduce the availability for others. An example of a non-rivalrous public good is street lighting. When one person benefits from the light, it does not reduce the amount of lighting available to others in the same area. Everyone can use it simultaneously, without diminishing the benefit for others.

Because of this, private firms may not have any incentive to provide street lighting. They would not make a profit by charging individuals for its use, since it is available to all. This is why street lighting is often funded and managed by local governments.

3. Non-Rejectability

A good is non-rejectable if individuals cannot refuse its consumption once it is provided. For instance, clean air is a non-rejectable good. People cannot avoid breathing air in a particular area, and once it is clean, everyone in that area benefits from it. Even if someone does not want to breathe the air, they cannot avoid doing so.

Governments often regulate pollution to ensure that clean air is available to all. Without regulation, the quality of air would suffer, and individuals might face harmful health consequences. However, since individuals cannot choose to avoid it, it’s important for governments to intervene and provide policies that protect clean air as a public good.

Street lights and national defence are prime examples of public goods due to their inherent characteristics of non-rivalry, non-excludability, and non-rejectability.

Street Lights: Street lights exemplify public goods for several reasons:

Non-rivalry: When street lights are turned on at night, one person's use of the light (for visibility, safety) doesn't reduce its availability to others. Every pedestrian or driver can simultaneously benefit without diminishing the light's usefulness.
Non-excludability: It's impractical, if not impossible, to prevent people from benefiting from street lights, whether they've contributed to their maintenance or not. For instance, both tax-paying citizens and tourists can use the illuminated streets at night without distinction.
Non-rejectability: Individuals can't opt-out of the benefits provided by street lights. Even if someone prefers darkness, they can't choose to reject the light on public streets.

National Defence: Similarly, national defence epitomises the concept of public goods:

Non-rivalry: A citizen's "use" or enjoyment of national defence doesn't limit its availability to others. The protection of one person doesn't detract from the security of their fellow citizens.
Non-excludability: It's impossible to exclude individuals within a country from benefiting from national defence, irrespective of whether they pay taxes or not. The military protection covers the entire nation, including non-taxpayers, tourists, and infants.
Non-rejectability: Citizens can't opt out of national defence. Even if they object to certain defence policies or military actions, they still indirectly benefit from the security it provides.

Market Failure Due to Public Goods

1. The Free Rider Problem

The free rider problem occurs when individuals can benefit from a good without paying for it. Since public goods are non-excludable, people can enjoy them without contributing to the cost, which leads to inefficiency in the market.

A good example of this is public broadcasting. Organizations like the BBC are funded by taxes or voluntary donations, but anyone can access their broadcasts without paying for it. If this system were left to the private market, it is likely that many public broadcasting services would not exist, or they would only be available to those who can afford to pay for them. This highlights the role of government in providing public goods that are vulnerable to the free rider problem.

2. Underproduction of Public Goods

Another issue with public goods is that they are often underproduced in a free market. Because private firms cannot profit from these goods (due to non-rivalry and non-excludability), they have no incentive to produce them in the quantity needed.

Public parks provide a great example of this. While parks offer benefits to all members of the community, private companies would struggle to make a profit from them. As a result, these spaces are often underfunded or neglected without government intervention. Governments step in to provide and maintain parks, ensuring everyone has access to these valuable public spaces.

Government Intervention

Due to the characteristics of public goods, government intervention is often necessary to ensure that these goods are produced and provided efficiently. Governments typically fund public goods through taxes, as this allows everyone to benefit from them without relying on private companies.

Take infrastructure projects like roads, bridges, and public transportation systems as an example. These are all public goods because they are non-excludable, non-rivalrous, and non-rejectable. Private firms cannot profitably provide these goods, so governments step in to fund and maintain them, ensuring their availability to everyone.

Discussion Questions

How do public goods lead to market failure, and why is government intervention necessary?
Can you think of other examples of public goods not mentioned in the chapter?
How does the free rider problem affect the provision of public goods?

Common Misconceptions

One prevalent misconception is that anything labelled 'public' is automatically classified as a public good. However, the designation of a public good is not determined by its name but by its economic characteristics - non-rivalry, non-excludability, and non-rejectability.

Consider public toilets, for example. While 'public' is in the name, they don't qualify as public goods. Firstly, access to public toilets can be easily controlled or restricted, making them excludable. This can be done by blocking off the entrance, requiring a key, or charging a fee.

Secondly, public toilets exhibit rivalry in consumption. This means that when one person is using a toilet cubicle, it's not available for others, making the supply diminishable or rivalrous.

Public libraries also fall into this category. While they are generally open for public use, they can exclude individuals under certain conditions such as not allowing entrance to those with food or without a membership card. Libraries also have a limited number of tables, chairs, and even books. When someone uses these resources, they're temporarily unavailable to others, thereby making them rivalrous in nature.

In conclusion, the terminology can be misleading. Despite the 'public' label, both public toilets and libraries do not meet the economic criteria of non-rivalry and non-excludability, and hence are not truly public goods.