Public good

Public good

Overview
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, a public good is a good that is non-rival
Rivalry (economics)
In economics, rivalry is a characteristic of a good. A good can be placed along a continuum ranging from rivalrous to non-rival. The same characteristic is sometimes referred to as subtractable or non-subtractable . A rival good is a good whose consumption by one consumer prevents simultaneous...

 and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good. In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.

For example, if one individual visits a doctor there is one fewer doctor's visit for everyone else, and it is possible to exclude others from visiting the doctor.
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Encyclopedia
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, a public good is a good that is non-rival
Rivalry (economics)
In economics, rivalry is a characteristic of a good. A good can be placed along a continuum ranging from rivalrous to non-rival. The same characteristic is sometimes referred to as subtractable or non-subtractable . A rival good is a good whose consumption by one consumer prevents simultaneous...

 and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good. In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.

For example, if one individual visits a doctor there is one fewer doctor's visit for everyone else, and it is possible to exclude others from visiting the doctor. This makes doctor visits a rivaled and excludable private good
Private good
A private good is defined in economics as "an item that yields positive benefits to people” that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous, i.e. consumption by one...

. Conversely, breathing air does not significantly reduce the amount of air available to others, and people cannot be effectively excluded from using the air. This makes air a public good, albeit one that is economically trivial, since air is a free good. A less straightforward example is the exchange of MP3
MP3
MPEG-1 or MPEG-2 Audio Layer III, more commonly referred to as MP3, is a patented digital audio encoding format using a form of lossy data compression...

 music files on the internet: the use of these files by any one person does not restrict the use by anyone else and there is little effective control over the exchange of these music files and photo files.

Non-rivalness and non-excludability may cause problems for the production of such goods. Uncoordinated markets driven by self-interested parties may be unable to provide these goods in optimal quantities, if at all. There is a good deal of debate and literature on how to measure the significance of public goods problems in an economy, and to identify the best remedies. These debates are highly relevant to political arguments about the role of markets in the economy. While it does not follow that because markets will not spontaneously provide pure public goods, the state should do so, it may well be that if some public agency does not provide them, they will simply not be provided at all, notwithstanding effective demand for them. Public goods problems are also closely related to externalities—complex multilateral externalities are typically accompanied by the same "free-rider" problem that occurs with non-rival, non-excludable goods and services.

Graphically, non-rivalry means that if each of several individuals has a demand curve for a public good, then the individual demand curves are summed vertically to get the aggregate demand curve for the public good . This is in contrast to the procedure for deriving the aggregate demand for a private good, where individual demands are summed horizontally.

Terminology, and types of goods


Paul A. Samuelson is usually credited as the first economist to develop the theory of public goods. In his classic 1954 paper The Pure Theory of Public Expenditure, he defined a public good, or as he called it in the paper a "collective consumption good", as follows:

...[goods] which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good...


This is the property that has become known as Non-rivalry. In addition a pure public good exhibits a second property called Non-excludability
Non-excludable good
In economics, a good or service is said to be excludable when it is possible to prevent people who have not paid for it from having access to it, and non-excludable when it is not possible to do so.- Examples :...

: that is, it is impossible to exclude any individuals from consuming the good.

The opposite of a public good is a private good
Private good
A private good is defined in economics as "an item that yields positive benefits to people” that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous, i.e. consumption by one...

, which does not possess these properties. A loaf of bread, for example, is a private good: its owner can exclude others from using it, and once it has been consumed, it cannot be used again.

A good which is rivalrous but non-excludable is sometimes called a common pool resource. Such goods raise similar issues to public goods: the mirror to the public goods problem for this case is sometimes called the tragedy of the commons
Tragedy of the commons
The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone's long-term interest for this...

. For example, it is so difficult to enforce restrictions on deep sea fishing that the world's fish stocks can be seen as a non-excludable resource, but one which is finite and diminishing.
The definition of non-excludability states that it is impossible to exclude individuals from consumption. Technology now allows radio or TV broadcasts to be encrypted such that persons without a special decoder are excluded from the broadcast.
Many forms of information good
Information good
Information good in economics and law is a type commodity whose main market value is derived from the information it contains. It may also include services...

s have characteristics of public goods. For example, a poem can be read by many people without reducing the consumption of that good by others; in this sense, it is non-rivalrous. Similarly, the information in most patents can be used by any party without reducing consumption of that good by others. Creative works may be excludable in some circumstances, however: the individual who wrote the poem may decline to share it with others by not publishing it. Copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...

s and patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....

s both encourage and inhibit the creation of such non-rival goods by providing temporary monopolies, or, in the terminology of public goods, providing a legal mechanism to enforce excludability for a limited period of time. For public goods, the "lost revenue" of the producer of the good is not part of the definition: a public good is a good whose consumption does not reduce any other's consumption of that good.
Debate has been generated among economists whether such a category of "public goods" exists. Steven Shavell has suggested the following:
...when professional economists talk about public goods they do not mean that there are a general category of goods that share the same economic characteristics, manifest the same dysfunctions, and that may thus benefit from pretty similar corrective solutions...there is merely an infinite series of particular problems (some of overproduction, some of underproduction, and so on), each with a particular solution that cannot be deduced from the theory, but that instead would depend on local empirical factors.


The economic concept of public goods should not be confused with the expression "the public good", which is usually an application of a collective ethical
Ethics
Ethics, also known as moral philosophy, is a branch of philosophy that addresses questions about morality—that is, concepts such as good and evil, right and wrong, virtue and vice, justice and crime, etc.Major branches of ethics include:...

 notion of "the good" in political decision-making. Another common confusion is that public goods are goods provided by the public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...

. Although it is often the case that Government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

 is involved in producing public goods, this is not necessarily the case. Public goods may be naturally available. They may be produced by private individuals and firms, by non-state collective action
Collective action
Collective action is the pursuit of a goal or set of goals by more than one person. It is a term which has formulations and theories in many areas of the social sciences.-In sociology:...

, or they may not be produced at all.

The theoretical concept of public goods does not distinguish with regard to the geographical region in which a good may be produced or consumed. However, some theorists (such as Inge Kaul) use the term global public good
Global public good
A global public good is a good that has the three following properties :* It is non-rivalrous. Consumption of this good by anyone does not reduce the quantity available to other agents.* It is non-excludable...

to mean a public good which is non-rival and non-excludable throughout the whole world, as opposed to a public good which exists in just one national area. Knowledge
Knowledge
Knowledge is a familiarity with someone or something unknown, which can include information, facts, descriptions, or skills acquired through experience or education. It can refer to the theoretical or practical understanding of a subject...

 has been held to be an example of a global public good.

Social goods


Social goods are defined as public goods that could be delivered as private good
Private good
A private good is defined in economics as "an item that yields positive benefits to people” that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous, i.e. consumption by one...

s, but are usually delivered by the government for various reasons, including social policy
Social policy
Social policy primarily refers to guidelines, principles, legislation and activities that affect the living conditions conducive to human welfare. Thus, social policy is that part of public policy that has to do with social issues...

, and funded via public funds like taxes.

Note: Some writers have used the term public good to refer only to non-excludable pure public goods. They may then call excludable public goods club goods.

Examples


Common examples of public goods include: defense
Defense (military)
Defense has several uses in the sphere of military application.Personal defense implies measures taken by individual soldiers in protecting themselves whether by use of protective materials such as armor, or field construction of trenches or a bunker, or by using weapons that prevent the enemy...

, public fireworks
Fireworks
Fireworks are a class of explosive pyrotechnic devices used for aesthetic and entertainment purposes. The most common use of a firework is as part of a fireworks display. A fireworks event is a display of the effects produced by firework devices...

, lighthouse
Lighthouse
A lighthouse is a tower, building, or other type of structure designed to emit light from a system of lamps and lenses or, in older times, from a fire, and used as an aid to navigation for maritime pilots at sea or on inland waterways....

s, clean air
Air pollution
Air pollution is the introduction of chemicals, particulate matter, or biological materials that cause harm or discomfort to humans or other living organisms, or cause damage to the natural environment or built environment, into the atmosphere....

 and other environmental good
Environmental good
Environmental goods are a sub-category of public goods which includes:* Clean air* Clean water* Landscape* Scenic towns* Green transport infrastructure * A diverse flora* A diverse fauna* Public parks...

s, and information good
Information good
Information good in economics and law is a type commodity whose main market value is derived from the information it contains. It may also include services...

s, such as software development
Software development
Software development is the development of a software product...

, authorship, and invention
Invention
An invention is a novel composition, device, or process. An invention may be derived from a pre-existing model or idea, or it could be independently conceived, in which case it may be a radical breakthrough. In addition, there is cultural invention, which is an innovative set of useful social...

.
Some goods (such as orphan drug
Orphan drug
An orphan drug is a pharmaceutical agent that has been developed specifically to treat a rare medical condition, the condition itself being referred to as an orphan disease...

s) require special governmental incentives to be produced, but can't be classified as public goods since they don't fulfill the above requirements (Non-excludable and non-rivalrous.) Law enforcement, streets, libraries, museums, and education are commonly misclassified as public goods, but they are technically classified in economic terms as quasi-public goods because excludability is possible, but they do still fit some of the characteristics of public goods.

The provision of a lighthouse
Lighthouse
A lighthouse is a tower, building, or other type of structure designed to emit light from a system of lamps and lenses or, in older times, from a fire, and used as an aid to navigation for maritime pilots at sea or on inland waterways....

 has often been used as the standard example of a public good, since it is difficult to exclude ships from using its services. No ship's use detracts from that of others, but since most of the benefit of a lighthouse accrues to ships using particular ports, lighthouse maintenance fees can often profitably be bundled with port fees (Ronald Coase
Ronald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...

, The Lighthouse in Economics
The Lighthouse in Economics
"The Lighthouse in Economics" is an academic paper written by British economist Ronald H. Coase.This paper challenges the traditional view that lighthouses are examples of public goods by showing that privately owned lighthouses existed in England. Coase aligned lighthouses more with club goods...

1974). This has been sufficient to fund actual lighthouses.

Technological progress can create new public goods. The most simple examples are street lights, which are relatively recent inventions (by historical standards). One person's enjoyment of them does not detract from other persons' enjoyment, and it currently would be prohibitively expensive to charge individuals separately for the amount of light they presumably use. On the other hand, a public good's status may change over time. Technological progress can significantly impact excludability of traditional public goods: encryption allows broadcasters
Broadcasting
Broadcasting is the distribution of audio and video content to a dispersed audience via any audio visual medium. Receiving parties may include the general public or a relatively large subset of thereof...

 to sell individual access to their programming. The costs for electronic road pricing
Road pricing
Road pricing is an economic concept regarding the various direct charges applied for the use of roads. The road charges includes fuel taxes, licence fees, parking taxes, tolls, and congestion charges, including those which may vary by time of day, by the specific road, or by the specific vehicle...

 have fallen dramatically, paving the way for detailed billing based on actual use.

There is some question as to whether defense is a public good. Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...

 argues, "'national defense' is surely not an absolute good with only one unit of supply. It consists of specific resources committed in certain definite and concrete ways—and these resources are necessarily scarce. A ring of defense bases around New York, for example, cuts down the amount possibly available around San Francisco." Jeffrey Rogers Hummel and Don Lavoie note, "Americans in Alaska and Hawaii could very easily be excluded from the U.S. government's defense perimeter, and doing so might enhance the military value of at least conventional U.S. forces to Americans in the other forty-eight states. But, in general, an additional ICBM in the U.S. arsenal can simultaneously protect everyone within the country without diminishing its services."

The free rider problem



Public goods provide a very important example of market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...

, in which market-like behavior of individual gain-seeking does not produce efficient
Inefficiency
The term inefficiency has several meanings depending on the context in which its used:*Algorithmic inefficiency - refers to less than optimum computer programs that might exhibit one of more of the symptoms of:** slow execution...

 results. The production of public goods results in positive externalities
Externality
In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...

 which are not remunerated. If private organizations don't reap all the benefits of a public good which they have produced, their incentives to produce it voluntarily might be insufficient. Consumers can take advantage of public goods without contributing sufficiently to their creation. This is called the free rider problem
Free rider problem
In economics, collective bargaining, psychology, and political science, a free rider is someone who consumes a resource without paying for it, or pays less than the full cost. The free rider problem is the question of how to limit free riding...

, or occasionally, the "easy rider problem" (because consumers' contributions will be small but non-zero). If too many consumers decide to 'free-ride', private costs exceed private benefits and the incentive to provide the good or service through the market disappears. The market thus fails to provide a good or service for which there is a need.

The free rider problem depends on a conception of the human being as homo economicus
Homo economicus
Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...

: purely rational and also purely selfish—extremely individualistic, considering only those benefits and costs that directly affect him or her. Public goods give such a person an incentive to be a free rider.

For example, consider national defense, a standard example of a pure public good. Suppose homo economicus thinks about exerting some extra effort to defend the nation. The benefits to the individual of this effort would be very low, since the benefits would be distributed among all of the millions of other people in the country. There is also a very high possibility that he or she could get injured or killed during the course of his or her military service.

On the other hand, the free rider knows that he or she cannot be excluded from the benefits of national defense, regardless of whether he or she contributes to it. There is also no way that these benefits can be split up and distributed as individual parcels to people. The free rider would not voluntarily exert any extra effort, unless there is some inherent pleasure or material reward for doing so (for example, money paid by the government, as with an all-volunteer army or mercenaries).

In the case of information good
Information good
Information good in economics and law is a type commodity whose main market value is derived from the information it contains. It may also include services...

s, an inventor of a new product may benefit all of society, but hardly anyone is willing to pay for the invention if they can benefit from it for free. In the case of an information good, however, because of its characteristics of non-excludability and also because of almost zero reproduction costs, commoditization is difficult and not always efficient even from a neoclassical economic point of view.

Assurance contracts


An assurance contract is a contract in which participants make a binding pledge to contribute to building a public good, contingent on a quorum of a predetermined size being reached. Otherwise the good is not provided and any monetary contributions are refunded.

A dominant assurance contract is a variation in which an entrepreneur creates the contract and refunds the initial pledge plus an additional sum of money if the quorum is not reached. (The entrepreneur profits by collecting a fee if the quorum is reached and the good is provided.) In game-theoretic
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...

 terms this makes pledging to build the public good a dominant strategy: the best move is to pledge to the contract regardless of the actions of others.

Coasian solution


The coasian solution, named for the economist Ronald Coase
Ronald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...

 and unrelated to the Coase theorem
Coase theorem
In law and economics, the Coase theorem , attributed to Ronald Coase, describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to...

, proposes a mechanism by which potential beneficiaries of a public good band together and pool their resources based on their willingness to pay to create the public good. Coase (1960) argued that if the transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...

s between potential beneficiaries of a public good are sufficiently low, and it is therefore easy for beneficiaries to find each other and pool their money based on the public good's value to them, then an adequate level of public goods production can occur even under competitive free market conditions. However, Coase (1988) famously wrote:

"The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave."


In some ways the formation of governments and government-like communities, such as homeowners association
Homeowners association
A homeowner association is a corporation formed by a real estate developer for the purpose of marketing, managing, and selling of homes and lots in a residential subdivision...

s can be thought of as applied instances of practicing the coasian solution by creating institutions to reduce the transaction costs.

A similar alternative for arranging funders of public goods production, which is especially applicable to information goods, is to produce the good but refuse to release it to the public until some form of payment to cover costs is met. Author Stephen King
Stephen King
Stephen Edwin King is an American author of contemporary horror, suspense, science fiction and fantasy fiction. His books have sold more than 350 million copies and have been adapted into a number of feature films, television movies and comic books...

, for instance, authored chapters of a new novel downloadable for free on his website while stating that he would not release subsequent chapters unless a certain amount of money was raised. Sometimes dubbed holding for ransom
Ransom
Ransom is the practice of holding a prisoner or item to extort money or property to secure their release, or it can refer to the sum of money involved.In an early German law, a similar concept was called bad influence...

, this method of public goods production is a modern application of the street performer protocol
Street Performer Protocol
The threshold pledge or fund and release system is a way of making a fundraising pledge as a group of individuals, often involving charitable goals or financing the provision of a public good. An amount of money is set as the goal or threshold to reach for the specified purpose and interested...

 for public goods production. Unlike assurance contracts, this relies on social norms to ensure (to some extent) that the threshold is reached and partial contributions are not wasted.

Government provision


If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. This saves each of us from our own tendency to be a free rider, while also assuring us that no one else will be allowed to free ride. One frequently proposed solution to the problem is for government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

s or states
State (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...

 to impose taxation to fund the production of public goods. This does not actually solve the theoretical problem because good government is itself a public good. Thus it is difficult to ensure the government has an incentive to provide the optimum amount even if it were possible for the government to determine precisely what amount would be optimum. These issues are studied by public choice theory
Public choice theory
In economics, public choice theory is the use of modern economic tools to study problems that traditionally are in the province of political science...

 and public finance
Public finance
Public finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...

.

Sometimes the government provides public goods using "unfunded mandates". An example is the requirement that every car
Automobile
An automobile, autocar, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor...

 be fit with a catalytic converter
Catalytic converter
A catalytic converter is a device used to convert toxic exhaust emissions from an internal combustion engine into non-toxic substances. Inside a catalytic converter, a catalyst stimulates a chemical reaction in which noxious byproducts of combustion are converted to less toxic substances by dint...

. This may be executed in the private sector
Private sector
In economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...

, but the end result is predetermined by the state: the individually involuntary provision of the public good clean air
Air pollution
Air pollution is the introduction of chemicals, particulate matter, or biological materials that cause harm or discomfort to humans or other living organisms, or cause damage to the natural environment or built environment, into the atmosphere....

. Unfunded mandates have also been imposed by the U.S. federal government on the state and local governments, as with the Americans with Disabilities Act, for example.

Subsidies and joint products


A government may subsidize
Subsidy
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...

 production of a public good in the private sector
Private sector
In economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...

. Unlike government provision, subsidies may result in some form of a competitive
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...

 market. The potential for cronyism
Crony capitalism
Crony capitalism is a term describing a capitalist economy in which success in business depends on close relationships between business people and government officials...

 (for example, an alliance between political insiders and the businesses receiving subsidies) can be limited with secret bidding for the subsidies or application of the subsidies following clear general principles. Depending on the nature of a public good and a related subsidy, principal agent problems can arise between the citizens and the government or between the government and the subsidized producers; this effect and counter-measures taken to address it can diminish the benefits of the subsidy.

Subsidies can also be used in areas with a potential for non-individualism: For instance, a state may subsidize devices to reduce air pollution
Air pollution
Air pollution is the introduction of chemicals, particulate matter, or biological materials that cause harm or discomfort to humans or other living organisms, or cause damage to the natural environment or built environment, into the atmosphere....

 and appeal to citizens to cover the remaining costs.

Similarly, a joint-product model analyzes the collaborative effect of joining a private good to a public good. For example, a tax deduction (private good) can be tied to a donation to a charity (public good). It can be shown that the provision of the public good increases when tied to the private good, as long as the private good is provided by a monopoly (otherwise the private good would be provided by competitors without the link to the public good).

Privileged group


The study of collective action
Collective action
Collective action is the pursuit of a goal or set of goals by more than one person. It is a term which has formulations and theories in many areas of the social sciences.-In sociology:...

 shows that public goods are still produced when one individual benefits more from the public good than it costs him to produce it; examples include benefits from individual use, intrinsic motivation to produce, and business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...

s based on selling complement good
Complement good
A complementary good, in contrast to a substitute good, is a good with a negative cross elasticity of demand. This means a good's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased...

s. A group that contains such individuals is called a privileged group
Privileged group
In economics, a privileged group is one possible condition for the production of public goods.A privileged group contains at least one individual that benefits more from a public good than its production costs. Therefore, the good will be produced although other members of the group benefit without...

. A historical example could be a downtown entrepreneur who erects a street light
Street light
A street light, lamppost, street lamp, light standard, or lamp standard is a raised source of light on the edge of a road or walkway, which is turned on or lit at a certain time every night. Modern lamps may also have light-sensitive photocells to turn them on at dusk, off at dawn, or activate...

 in front of his shop to attract customers; even though there are positive external benefits to neighboring nonpaying businesses, the added customers to the paying shop provide enough revenue to cover the costs of the street light.

The existence of privileged groups may not be a complete solution to the free rider problem, however, as underproduction of the public good may still result. The street light builder, for instance, would not consider the added benefit to neighboring businesses when determining whether to erect his street light, making it possible that the street light isn't built when the cost of building is too high for the single entrepreneur even when the total benefit to all the businesses combined exceeds the cost.

An example of the privileged group solution could be the Linux
Linux
Linux is a Unix-like computer operating system assembled under the model of free and open source software development and distribution. The defining component of any Linux system is the Linux kernel, an operating system kernel first released October 5, 1991 by Linus Torvalds...

 community, assuming that users derive more benefit from contributing than it costs them to do it. For more discussion on this topic see also Coase's Penguin.

Another example is those musicians and writers who create music and writings for their own personal enjoyment, and publish because they enjoy having an audience. Financial incentives are not necessary to ensure the creation of these public goods. Whether this creates the correct production level of writings and music is an open question.

Merging free riders


Another method of overcoming the free rider problem is to simply eliminate the profit incentive for free riding by buying out all the potential free riders. A property developer that owned an entire city street, for instance, would not need to worry about free riders when erecting street lights since he owns every business that could benefit from the street light without paying. Implicitly, then, the property developer would erect street lights until the marginal social benefit met the marginal social cost. In this case, they are equivalent to the private marginal benefits and costs.

While the purchase of all potential free riders may solve the problem of underproduction due to free riders in smaller markets, it may simultaneously introduce the problem of underproduction due to monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

. Additionally, some markets are simply too large to make a buyout of all beneficiaries feasible - this is particularly visible with public goods that affect everyone in a country.

Introducing an exclusion mechanism (club goods)


Another solution, which has evolved for information goods, is to introduce exclusion mechanisms which turn public goods into club good
Club good
Club goods are a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs...

s. One well-known example is copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...

 and patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....

 laws. These laws, which in the 20th century came to be called intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...

 laws, attempt to remove the natural non-excludability by prohibiting reproduction of the good. Although they can address the free rider problem, the downside of these laws is that they imply private monopoly power and thus are not Pareto-optimal.

For example, in the United States, the patent rights given to pharmaceutical companies encourage them to charge high prices (above marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...

) and to advertise to convince patients to persuade their doctors to prescribe the drugs . Likewise, copyright provides an incentive for a publisher to act like The Dog in the Manger
The Dog in the Manger
The story and metaphor of The Dog in the Manger derives from an old Greek fable which has been transmitted in several different versions. Interpreted variously over the centuries, it is used now of those who spitefully prevent others from having something that they themselves have no use for...

, taking older works out of print
Out of print
Out of print refers to an item, typically a book , but can include any print or visual media or sound recording, that is in the state of no longer being published....

 so as not to cannibalize revenue from the publisher's own new works.

The laws also end up encouraging patent and copyright owners to sue even mild imitators in court and to lobby for the extension of the term of the exclusive rights in a form of rent seeking
Rent seeking
In economics, rent-seeking is an attempt to derive economic rent by manipulating the social or political environment in which economic activities occur, rather than by adding value...

.

These problems with the club-good mechanism arise because the underlying marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...

 of giving the good to more people is low or zero, but, because of the limits of price discrimination
Price discrimination
Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...

 those who are unwilling or unable to pay a profit-maximizing price do not gain access to the good.

If the costs of the exclusion mechanism are not higher than the gain from the collaboration, club good
Club good
Club goods are a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs...

s can emerge naturally. James M. Buchanan
James M. Buchanan
James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...

 showed in his seminal paper that clubs can be an efficient alternative to government interventions.

On the other hand, because of the inherent inefficiency of club good provision, it is sometimes preferable to treat even naturally excludable club goods as public goods, and produce them by some other mechanism. Examples of such "natural" club goods include natural monopolies
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...

 with very high fixed costs, private golf course
Golf course
A golf course comprises a series of holes, each consisting of a teeing ground, fairway, rough and other hazards, and a green with a flagstick and cup, all designed for the game of golf. A standard round of golf consists of playing 18 holes, thus most golf courses have this number of holes...

s, cinema
Movie theater
A movie theater, cinema, movie house, picture theater, film theater is a venue, usually a building, for viewing motion pictures ....

s, cable television
Cable television
Cable television is a system of providing television programs to consumers via radio frequency signals transmitted to televisions through coaxial cables or digital light pulses through fixed optical fibers located on the subscriber's property, much like the over-the-air method used in traditional...

 and social clubs. This explains why many such goods are often provided or subsidized by governments, co-operatives or volunteer associations, rather than being left to be supplied by profit-minded entrepreneurs. These goods are often known as social goods.

Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...

 claimed that the "excess profits," or profits over normal profit, generated by the copyright or patent monopoly will attract competitors that will make technological innovations and thereby end the monopoly. This is a continual process referred to as "Schumpeterian creative destruction
Creative destruction
Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto and were expanded in Marx's Grundrisse and "Volume...

", and its applicability to different types of public goods is a source of some controversy. The supporters of the theory point to the case of Microsoft, for example, which has been increasing its prices (or lowering its products' quality), predicting that these practices will make increased market shares for Linux and Apple largely inevitable.

A nation
Nation
A nation may refer to a community of people who share a common language, culture, ethnicity, descent, and/or history. In this definition, a nation has no physical borders. However, it can also refer to people who share a common territory and government irrespective of their ethnic make-up...

 can be seen as a club whose members are its citizens. Government would then be the manager of this club. This is further studied in the Theory of the State.

Social norms


If enough people do not think like free-riders, the private and voluntary provision of public goods may be successful. A free rider might litter
Litter
Litter consists of waste products such as containers, papers, wrappers or faeces which have been disposed of without consent. Litter can also be used as a verb...

 in a public park, but a more public-spirited individual would not do so, getting an inherent pleasure from helping the community. In fact, one might voluntarily pick up some of the existing litter. If enough people do so, the role of the state in using taxes to hire professional maintenance crews is reduced. This might imply that even someone typically inclined to free-riding would not litter, since their action would have such a cost.

Public mindedness may be encouraged by non-market solutions to the economic problem, such as tradition
Tradition
A tradition is a ritual, belief or object passed down within a society, still maintained in the present, with origins in the past. Common examples include holidays or impractical but socially meaningful clothes , but the idea has also been applied to social norms such as greetings...

 and social norms. For example, concepts such as nationalism
Nationalism
Nationalism is a political ideology that involves a strong identification of a group of individuals with a political entity defined in national terms, i.e. a nation. In the 'modernist' image of the nation, it is nationalism that creates national identity. There are various definitions for what...

 and patriotism
Patriotism
Patriotism is a devotion to one's country, excluding differences caused by the dependencies of the term's meaning upon context, geography and philosophy...

 have been part of most successful war efforts, complementing the roles of taxation and conscription. To some extent, public spiritedness of a more limited type is the basis for voluntary contributions that support public radio and television
Public broadcasting
Public broadcasting includes radio, television and other electronic media outlets whose primary mission is public service. Public broadcasters receive funding from diverse sources including license fees, individual contributions, public financing and commercial financing.Public broadcasting may be...

. Contributions to online collaborative media like Wikipedia
Wikipedia
Wikipedia is a free, web-based, collaborative, multilingual encyclopedia project supported by the non-profit Wikimedia Foundation. Its 20 million articles have been written collaboratively by volunteers around the world. Almost all of its articles can be edited by anyone with access to the site,...

 and many other projects utilising wiki
Wiki
A wiki is a website that allows the creation and editing of any number of interlinked web pages via a web browser using a simplified markup language or a WYSIWYG text editor. Wikis are typically powered by wiki software and are often used collaboratively by multiple users. Examples include...

 technology can also be seen to represent an example of such public spiritedness, since they provide a public good (information) freely to all readers.

Groups relying on such social norms often have a federated structure, since collaboration emerges more readily in smaller social groups than in large ones (e.g. see Dunbar's number
Dunbar's number
Dunbar's number is suggested to be a theoretical cognitive limit to the number of people with whom one can maintain stable social relationships. These are relationships in which an individual knows who each person is, and how each person relates to every other person...

). This explains why labor unions or charities are often organized this way.

Efficient production levels of public goods


A public good is provided efficiently at the level where the combined marginal rate of substitution
Marginal rate of substitution
In economics, the marginal rate of substitution is the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility.-Marginal rate of substitution as the slope of indifference curve:...

 of all individuals is equal to the marginal rate of transformation. (The marginal rate of substitution is the rate at which an individual is willing to exchange a private good for a public good, the marginal rate of transformation is the quantity of a private good which the society has to give up in order to produce one unit of a public good).

When should a public good be provided?
To illustrate the basic principle, consider a community composed of just two consumers. The government is considering whether or not to provide a park. Arthur is prepared to pay up to $200 for use of the park, while Julia is willing to pay up to $100. The total value to the two individuals of having the park is $300. If it can be produced for $225, there is a $75 gain on its production since it provides services that the community values at $300 at a cost of only $225.

Regardless of the method of providing public goods, the efficient level of such provision is still being subjected to economic analysis. For instance, the Samuelson condition
Samuelson condition
The Samuelson condition, authored by Paul Samuelson, in the theory of public goods in economics, is a condition for the efficient provision of public goods...

 calculates the efficient level of public goods production to be where the ratio of the marginal
Marginalism
Marginalism refers to the use of marginal concepts in economic theory. Marginalism is associated with arguments concerning changes in the quantity used of a good or service, as opposed to some notion of the over-all significance of that class of good or service, or of some total quantity...

 social cost
Social cost
Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits...

 of public and private goods production equals the ratio of the marginal social benefit of public and private goods production.

"If the amount of a public good can be varied continuously, the optimal quantity to produce is that quantity for which the marginal cost of the last unit is just equal to the sum of the prices that all consumers would be willing to pay for that unit."
This equilibrium guarantees that the last unit of the public good costs as much to produce as the value that it gives to all of its consumers.

See also

  • Public services
    Public services
    Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...

     - a term usually used to mean services provided by government
    Government
    Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

     to its citizens
  • Public value
    Public value
    Public value is the equivalent of shareholder value in public management. Public value can be instituted as an organising principle in a public sector organisation, providing a focus in the context of which individual employees are free to pursue and propose new ideas about how to improve the...

     - the equivalent of shareholder value
    Shareholder value
    Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders...

     in public management
    Public management
    Public management is a term that considers that government and non-profit administration resembles private-sector management in some important ways. As such, there are management tools appropriate in public and in private domains, tools that maximize efficiency and effectiveness...

  • Collective action
    Collective action
    Collective action is the pursuit of a goal or set of goals by more than one person. It is a term which has formulations and theories in many areas of the social sciences.-In sociology:...

  • Common-pool resource
    Common-pool resource
    In economics, a common-pool resource , also called a common property resource, is a type of good consisting of a natural or human-made resource system , whose size or characteristics makes it costly, but not impossible, to exclude potential beneficiaries from obtaining benefits from its use...

     (also common property resource)
  • Externalities
  • Lindahl equilibrium
    Lindahl equilibrium
    A Lindahl tax is a form of taxation in which individuals pay for the provision of a public good according to their marginal benefits. So each individual pays according to his/her marginal benefit derived from the public good. eg...

    , a method proposed by Erik Lindahl for financing public goods
  • Mechanism design
    Mechanism design
    Mechanism design is a field in game theory studying solution concepts for a class of private information games...

    , the art of designing rules to achieve a specific outcome
  • Nash equilibrium
    Nash equilibrium
    In game theory, Nash equilibrium is a solution concept of a game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his own strategy unilaterally...

  • Natural monopoly
    Natural monopoly
    A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...

    , a situation where a single firm can produce a desired output at a lower cost than several firms
  • Private-Collective Model of Innovation
    Private-collective model of innovation
    The term private-collective model of innovation was coined by Eric von Hippel and Georg von Krogh in their 2003 publication in Organization Science...

     which explains the creation of public goods by private investors
  • Public bad
    Public bad
    A public bad, in economics, is the symmetric of a public good. Air pollution is the most obvious example since it is non-excludable and non-rival, and negatively affects welfare....

  • Public Choice, the use of economic tools to study problems of constitutional democracy
  • Public goods game
    Public goods game
    The Public goods game is a standard of experimental economics. In the basic game, subjects secretly choose how many of their private tokens to put into the public pot. The tokens in the pot are multiplied by a factor and this "public good" payoff is evenly divided among players...

    , a standard of experimental economics
  • Public works
    Public works
    Public works are a broad category of projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community...

    , government-financed constructions
  • Tragedy of the commons
    Tragedy of the commons
    The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone's long-term interest for this...

     and of the anticommons
    Tragedy of the anticommons
    The tragedy of the anticommons is a neologism coined by Michael Heller to describe a coordination breakdown where the existence of numerous rightsholders frustrates achieving a socially desirable outcome. The term mirrors the older term tragedy of the commons used to describe coordination...


External links