Public Goods

A private good is one for which each unit is consumed by only one individual or household. The key characteristics of a private good are excludability and rivalry. Excludability means that once a unit of the good is purchased by an individual, all other individuals are excluded from purchasing that particular unit of the good. Rivalry means that any purchase of a unit of the good means that there are less units available for all other purchasers.

A pure public good exhibits neither excludability nor rivalry. National defense is a pure public good. It is “consumed” by everyone, but this consumption does not reduce the amount available to everyone else. Many goods are neiter purely public nor purely private. A highway behaves like a public good when it is lightly used, but under heavy traffic it behaves more like a private good.

Market forces will not lead to economic efficiency for public goods, because of the free rider problem. The example given is ten wealthy families living on a lake, on which a mosquito problem exists. The cost of spraying the lake is sufficiently low that each family considers it worthwhile to spray the lake. If the ten families do not communicate, then each will independently decide to spray the lake. This is a gross misallocation of resources because the lake will be sprayed ten times when only once would have sufficed for all the families.

Alternately, one of the homeowners might observe another spraying the lake, and if asked to contribute to the cost, could claim to enjoy the mosquitoes. There is no way to deny the non-paying homeowner the benefit of the paying homeonwner’s expenditure. What’s more, it is unlikely that the lake will actually be sprayed, because each homeowner will wait for one of the others to pay the cost.

The solution to this problem is for all the homeowners to get together and agree to act collectively. However, this behavior will not arise from a free market. One of the main functions of government is to ensure the production of public goods which people want but which would not be produced in a pure market economy. Examples: Police and fire protection; national defense; pure research; roads; public parks. Not all people enjoy these goods equally, and tax structures are such that not all people pay for the equally, but these are generally matters of policy, not economics.

However, the government must attempt to produce an economically efficient allocation of resources to the production of public goods. In order to do so, it must attempt to calculate the marginal social benefit and marginal social cost of any given program, and attempt to equate the ratios of MSB/MSC for each program in which it engages. The benefits and costs must include estimates not only of the direct actions to be taken, but also the opportunity costs and wider changes resulting from the actions. For example, an immunization program not only reduces medical costs, but also decreases absences and therefore increases worker productivity. A university subsidy also increases worker productivity, but at the same time it decreases output because new students enrolling at the subsidized price would otherwise presumably have been workers.