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Introduction to Public Goods

Consider two different goods, a hamburger and national defense. What are the differences between these two goods that are essential to determining feasible ways to provide them? Let?s see how they are consumed. Notice that the hamburger can be consumed only by one person. If I eat it, you can?t. This means that the hamburger is eaten only by the person who orders it and pays for it, other individuals are excluded from the consumption of the same good. In order to provide a hamburger to other consumers who would like to buy it, additional resources are required.

On the other hand, the national defense cannot be consumed only by one person or by a selected group of individuals. It is consumed jointly ? if I consume it, so do you. Once the government spends billions of dollars on the national defense, everybody who lives in that country enjoys some level of protection and security. It is provided in the same amount to all consumers, no matter if they desire more or less than the current level and no matter how much they value it. Such a situation is a special case of consumption externality.

So what are the main differences between a hamburger and national defense? Let?s take a look how economists think about these two examples.

A hamburger is a private good provided by some restaurant or a fast-food chain. Such products are usually produced by individual private firms and then sold in a market to consumers who pay a certain price in order to obtain them. On the other hand, the national defense provided by the government is a public good. However, it is not a rule of thumb to look at the supplier of a good, whether it is a government or a private business, to be able to distinguish between a private good and a public good. For example the Public Broadcasting System is a public good but it is not provided by a government but rather by private companies. The reasons why most public goods are provided by government we will discuss in later sections.

How do we then know whether a good is public or private? The first feature that distinguishes the public goods from conventional economic private goods is non-excludability. Non-excludability means that once the goods are produced, there is no way to exclude anybody from consuming them, i.e. they are consumed jointly. Examine a different example of public good ? street lights. Once they are built and working, every person that happens to be on a street consumes it, there is no way to take the light away from anybody.

The second distinctive feature of public goods is non-subtractability, or non-rivalness. Non-subtractability means that once the good is provided it is not depletable. This means that if the number of consumers increases, the marginal benefit of any consumer derived from consumption of the public good does not change. Consider the street lights example again. If yet another person is to enjoy the light provided by them, it is not used up in the process of consumption - there is not less light - unlike in the case of all private goods.

The goods that are characterized by both non-excludability and non-subtractability properties are called pure public goods. However, there are many hybrid goods that posses some features of both public and private goods but whose consumption by one consumer does not preclude other members of society from consuming them to some extend. This category is called impure public goods. A perfect example is a highway system. Once built, everybody who owns a vehicle can use it. That means the impure public good can also be consumed jointly. However, in some instances there is a way to exclude certain individuals from using them or at least make them pay for the consumption by using tolls. Why would anyone want to exclude some people from enjoying the highway system? Because increasing the group size of consumers decreases the marginal benefit to an individual - the highways are getting too crowded. This leads to yet another special class of impure public goods which are subtractable, called common-pool resources, such as fisheries and pastures. Anyone can fish in an open-access fishery, but the caught fish remain in posession of the fisherman who caught them and unless released they cannot be caught again. However, if too many vessels fish in such a fishery, it also gets crowded, thus similar to highways. We devote an entire section to common-pool resources problems.

The table below provides a quick reference for the classification of a good, depending on its excludability or rivalness properties. For more details on each category in the table, see the section on the Classification Table.

Yes No
Subtractable: Yes Private Goods Common-Pool Resources
NoClub Goods Public Goods

Public Goods Examples

Some more examples of public goods include:

Pure Public Goods:

  • Military protection/National defence
  • Lighthouses
  • Street lights
  • Clean air
  • Pollution abatement

Impure Public Goods:

  • Aerial spraying of pesticide
  • Airports
  • Parks
  • Highway system
  • Streets and sidewalks

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