Public goods

Public goods are goods which, when supplied to one individual, are automatically supplied to other individuals without them being required to pay.

In other words, the supply of public goods is subject to the 'free-rider' problem. Once the good is supplied other individuals can use the good for free.

This means that markets will not form because the price mechanism is prevented from working fully. The development of an economic theory of public goods owes much to US Nobel Prize winning economist, Paul Samuelson1, who defined a public good as goods where individuals could not be excluded from benefitting from it, and where there was no rivalry between consumers to derive benefit [or utility] from the good.

Public goods, club goods and private goods.

Taking Samuelson's definition as a starting point we can develop the analysis further and distinguish 'pure' public goods and private goods, as well as what are called 'club' goods, and 'common property' resources.

While pure public goods are characterised by non-excludability and non-rivalry, private goods exhibit both excludability and rivalry. Club goods are essentially private goods, where non-members can be excluded, but where rivalry between members does not exist (unless the club becomes 'congested). Charging is based on a fee to 'join' the club.

Finally, common property goods/resources, exhibit some rivalry in that one user can reduce stocks for others, but where access cannot be denied.

Positive output gap

It is important to recognise that there are 'degrees' of 'public-ness'. For example, the climate and clean air exhibits a high degree of publicness, whereas farmland and forests have less publicness.

Street lighting as a public good

If we take the example of street-lighting, we can see how markets are unlikely to form:

Example

To build and operate a system of street lighting for a town or city there are considerable fixed costs, which need to be paid before any street lighting can be provided.

This means that, in a free market, the potential supplier must feel that they are able to break-even and eventually make a return on their capital employed. In a free market, producers must be able to charge a price in order to generate revenue, and then break even. However, charging a price at the point of use or consumption is difficult, if not impossible. This is a result of four interconnected features of public goods:

The principle of non-exclusion

Once a street lighting network is built, and operates, it would be impossible to charge because of the free rider problem - no-one can be excluded from benefitting from well lit streets. As soon as the lights come on, anyone passing along the street can benefit. No-one would be prepared to pay for something that they can already benefit from for free.

The principle of non-rivalry

Once street lighting is provided there is no need for users to compete with other users for the benefit. From the user's point of view, there is an apparent 'lack of scarcity' - none of the usual signals of scarcity exist - no queues, no waiting lists, and no shortages.

The principle of non-diminishing public goods

In a similar way, once a public good is supplied the use of energy (along with other scarce resources) will occur at a fixed rate, irrespective of whether people are using it or not. The rate of use of resources will be the same whether one person or one hundred people are walking down the street - indeed, the use is the same if no-one walks down the street. This is also referred to as the principle of non-subtraction [One more unit for one individual does not mean one less for another.]

Non-rejection of public goods

Unlike private goods supplied in markets, public goods cannot be 'rejected' or taken back if 'unwanted'. This means a consumer has no leverage if supply is faulty.

If we put these four features together it is clear that consumers would be very unwilling to pay for each unit consumed (for each walk down the street) and, hence, producers would be unwilling to be involved in the supply of street lighting, or other public goods.

Quasi-public goods

Quasi-public goods fall somewhere between pure public goods and private goods. Roads, bridges and parks are commonly cited as example of quasi-public goods.

With these, there is some degree of excludability - for example, it is possible to prevent drivers from using roads and bridges (through tolls) and parks and other open spaces can be gated.

There is also some element of rivalry and diminishabiity. Drivers compete with each other for road space, and visitors to a park may compete with others to get the best place to have their picnic.

Finally, drivers do not have to use a specific road, and those looking to have a picnic do not have to use a particular park, so there is the ability to reject these quasi public goods.

Hence, with quasi-public goods it is possible for

Remedies

It is clear that public goods provide utility, and satisfy a need, but markets would fail to satisfy that need. Hence, non-market solutions have been used to provide public goods, including:

For pure public goods

  • Allowing the state to raise general taxes to fund building and maintenance. However, there are issues in terms of how taxes are charged and how the tax is calculated.
  • Charging local taxes. Again, there are similar issues in terms of how taxes are charges and calculated.

In addition, for quasi-public goods

  • Charging for use of road space. Similarly, difficulties arise in terms of how road space is valued, and it is may not be possible to charge drivers for every road they use. For example, charging for using key motorways may be straightforward, but erecting tolls for all small an side roads would not be practical.
  • Charging for access to parks and beaches, but again, establishing non-market prices is not a straightforward process.

Conclusion

While the 'textbook' examples of public goods (such as street lighting) fit fairly neatly into the definition above, there are goods which do not fit so well. For example, knowledge and the internet are usually regarded as public goods, but knowledge can be packaged and sold just as private goods are. Some knowledge is only used by, or understood by a small number of individuals, including the specialist knowledge associated with highly skilled professions. Access to this knowledge is unlikely to be free, hence there is no free-rider effect.

There are also issues regarding distinguishing public goods and merit goods. Even a very brief review of notable websites on economics indicates considerable variation in how certain goods are classified.

Take vaccinations - around half of websites visited gave vaccinations as an example of public goods while another half defined them as merit goods.

This highlights the need for care and consistency in how the topic is approached. The vaccination itself more closely fits the definition of a merit good - it provides considerable benefit to others, but individuals CAN be excluded, and they CAN reject it - also, in using one dose there is one dose LESS for someone else. Hence, in this respect, vaccinations are not public goods.

However, the effect of a vaccination programme may be herd immunity. If we consider herd immunity as a good, then this fits the definition of a public good. Immunity for one individual does not reduce it for others - if fact it increases it for others and there is a (albeit 'perverse') 'free-rider' effect. Herd immunity cannot be rejected, and in this respect it is a public good.

This is similar to the classification of knowledge. If a writer uses a pen and paper (both private goods) to write a book of poetry (a private good), and, years later, the poem is taught at school in English lessons (with education regarded as a merit good), the poem itself may enter into common usage, which everyone is then free to use, and where reciting the poem does not mean there is one less recitation for others (a public good.) What this means is that we must be careful in labeling goods as private, merit or public without clearly explaining why we have drawn this conclusion.

1. Samuelson, P. A. (1954) The pure theory of public expenditure, Review of Economics and Statistics, vol. 36 pp. 387-389; Samuelson, P. A. (1955) A diagrammatic exposition of a theory of public expenditure, Review of Economics and Statistics, vol 37 pp. 350-356


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